Is 401(k) Worth It If Employer Does Not Match?

During hard times, companies sometimes decide to stop contributing to your 401(k).  Naturally, you might be wondering if it’s worth it for you to keep contributing?

The answer, I think, is yes and no.

Here’s why I say no

There is one main reason why I would stop making contributions to your 401(k) if your company stops or doesn’t match at all. And that is only if you have another retirement plan, preferably a Roth IRA.

Not only do you need to have one, but you need to have a plan around making contributions on a regular basis.  It would make most sense to contribute the amount you were contributing to your company plan, but it might also be worth contributing even more than that.

From a mathematical perspective, a Roth makes most sense when it comes to protecting the most amount of money from taxes.  A Roth grows tax free, so the more you put there, the more money you will protect from taxes.

If a company is matching, you are getting free money, and nothing beats free!  That’s why as a general rule, you want to invest up to at least the company match – but that is probably not where you should stop.

If a company matches 5 percent, you’ll need about 10 percent more invested elsewhere. Otherwise, you’ll likely not have enough for retirement.

That’s where the Roth comes in.

Related: Best Vanguard Funds for Roth IRA

If you invest 10 percent into a Roth – on top of the 5 percent you and your employer are putting in your 401(k) – you will have some serious momentum going.

However, if your employer stops matching, it might be time for you to stop, too, and start dumping the full 15 percent into a Roth.  And again, you do this for the tax benefits.

For example, if you invest tens of thousands of dollars into a 401(k) – and it turns into millions of dollars – you will have to pay taxes on millions instead of thousands.

Whereas with a Roth, you’ll only have to pay taxes on thousands and pay no taxes on the millions that you’ll withdrawal. This might literally save you hundreds of thousands (if not millions) of dollars in taxes.

So it makes sense to put as much money as possible towards a Roth, especially if your employer stops (or doesn’t match) your 401(k) contributions.

Obviously, you have to be disciplined to do this.  The last thing you want to do is stop making 401(k) contributions and not fund a Roth either.

If that might be the case, I would keep funding your 401(k) – even if your company doesn’t match.

Here’s why I say yes

You’re already doing it

If you’re already contributing to a 401(k), why not keep doing it?

It seems like it’s been okay up to this point – it’s in your budget, you know how much money to expect from your paychecks – why disrupt that?

The easier thing to do, would simply be to keep doing what you have been.

Once again, I would hate for you to stop investing in your 401(k) with the intention of investing that money elsewhere and fail to do so.

You want to continue to invest as long and as often as possible; a 401(k) will help you do that.

It keeps you in the market

The 401(k) is an easy way to get exposure to the stock market, and stay in the stock market (even if your employer doesn’t match).

No need to stop contributing just because your employer doesn’t (the employer match is just a bonus).

The only reason I suggested not to contribute was if you had a plan to contribute elsewhere (like a Roth IRA).

If you don’t have a plan to do that, or if you think it’s possible that you won’t, then definitely keep contributing.

This keeps you in the market – investing on a regular basis – and that’s what’s most important: getting in the market early and staying there.

Also, by continuing to contribute to your 401(k), it takes all the guess work out of trying to “time the market.” You simply keep on investing with every passing paycheck, regardless of market conditions – easy.

Your company might start matching

One reason you might continue to fund your 401(k) is because it’s possible that your employer will start matching again.

It’s somewhat odd that an employer would never consider doing a 401(k) match (at least up to some percentage).

If it’s because of hard times, those times will likely improve and it might behoove them to start matching again in order to stay competitive.

It’s likely that as circumstances improve – and employers have positions to fill – they will start hiring again.

However, if the employer doesn’t offer decent benefits, or benefits that make them competitive, it will be more difficult for that employer to fill those positions. A 401(k) match is a great benefit that would certainly attract applicants.

If other employers start matching 401(k)s, it’s even more likely that your employer will start matching again – in order to stay competitive.

If not, you might consider a new employer. Then you can take all your contributions with you – my next point.

You can roll it over to another company

The great thing about 401(k)s is that many companies have them. You would be hard pressed to find one that doesn’t.

Related: Best Funds for Your Company 401(k)

What’s nice about that is you are able to roll funds from one 401(k) to another. This is easy to do, and it allows you to keep all of your retirement savings in one account.

When you start a 401(k), you can get some serious momentum going – especially if you start early and continue contributing throughout your working years.

As you change jobs or careers, you will want to roll it over to the new employer. A 401(k) rollover allows you to take that money to any employer you’d like, allowing you to accumulate some serious wealth along the way.

Bottom line

At the end of the day, it all comes down to you; what is gonna work best for you?

Only you know the answer to that.  When you weigh your options, hopefully the answer will be clear.

I truly believe there are good reasons to keep a 401(k) going, even if your company doesn’t match. I also believe there’s a good reason not to. Like I said, it’s a yes and no answer.

Let me tell you this.

Recently, my company stopped contributing to my 401(k), so I had to weigh my options. Ultimately, I decided that the 401(k) was still worth doing. That seemed to make the most sense to me since I like to keep things as simple as possible with my finances.

For you it might be different.