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When Should You Stop Contributing to Your 401(k) Plan?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Unexpected personal expenses can disrupt your budget, and too much credit card spending can push your debt balance into the red — at times like these, you might consider pausing contributions to your 401(k). Although saving for retirement should always be one of your core financial goals, there are times when you may need to stop contributing to your 401(k) retirement plan. Read on, and we’ll review them all.

When your employer doesn’t offer matching 401(k) contributions

One of the biggest benefits offered by the 401(k) is matching contributions. With matching contributions, your employer matches the money you deposit in your 401(k) dollar-for-dollar, up to a certain threshold. This helps turbocharge your retirement savings at no extra cost to you.

However, not all employers offer matching contributions. You can still contribute to your 401(k) even if your employer doesn’t offer a match, but a lack of matching contributions might make you consider other retirement savings options, such as an individual retirement account (IRA), depending on your savings goals.

When your 401(k) fees are too high

If your employer doesn’t offer matching contributions, a good way to gauge whether the 401(k) plan is a good choice for your retirement savings is to look at the fees. If the fees charged by your employer’s 401(k) plan are higher than you like, consider other retirement savings options.

Fees charged by 401(k) plans fall into three broad categories: investment fees, 12b-1 fees and administrative fees.

  • Investment fees: These fees cover the cost of managing the investments and are disclosed in mutual fund or ETF prospectuses. Some funds charge a load fee, which is an industry term for a sales charge or commission. This can be charged up front, in which case it is called a front-end load. Or, it may be paid when the shares are sold, known as a back-end load or redemption fee.
  • 12b-1 fees: This is a type of investment fee, named after the Securities and Exchange Commission (SEC) rule requiring its disclosure. This fee covers a mutual fund’s marketing and distribution costs, and broker commissions. Some mutual funds charge a 12b-1 fee in place of a load fee.
  • Administrative and service fees: Typically charged as flat fees, these cover the costs of administering the plan, or special add-on costs for 401(k) loans or hardship withdrawals. Administrative fees run to a few hundred dollars per participant, per year. They may not always be disclosed.

Total fees charged on your 401(k) can range from 10 basis points to 2% to 3%. You pay the plan administrator these fees out of your investment balance, and while a few percentage points a year may not sound like much, these fees add up over the life of your 401(k).

Imagine a 29-year-old investor who contributes $19,500 per year to her company’s 401(k) and plans to retire at age 65. Her current 401(k) balance is $100,000, and fees are 3%. Just by switching to a plan that cuts fees in half, to 1.5%, she could save $845,569 by the time she retires. Instead of having $1.9 million upon retirement, she could have more than $2.7 million.

Check out the fee calculator we used to find out just how much your fees are costing you
Remember, even if your 401(k) has high fees, an employer match is still worth considering. Many times, the match will more than cover the fees.

When you have too much debt

While it’s always possible to both pay down debt and make 401(k) contributions, large debt loads charging high interest rates may require more budgetary attention. Very high APRs from your credit card issuers or a debt-to-income ratio that’s too high may mean you should prioritize paying off debt ahead of saving for retirement.

The key thing to consider is how much you’re paying in interest on your debt compared to the returns you’re getting on your investments. If you’re paying an APR of 15% to 20% to a credit card company but you’re only seeing an annual return of 5% to 8% on your 401(k) investments, you may be losing money. That said, pausing contributions to accelerate your debt payoff means you’ll need to play catch-up on your retirement savings later.

When your expenses are too high

Sometimes life gets in the way of your financial goals, especially when emergency spending disrupts your budget. We always advise our readers to build a healthy emergency fund to be prepared for large, unexpected costs or major medical emergencies, but if your fund is low or non-existent, it might be time to hit pause on your 401(k) contributions.

Think hard about expenses that are high enough to make you consider pausing your 401(k) contributions. Can you meet them by cutting out other spending, or refining your budget? Our rule of thumb for when to dip into your emergency fund holds good here as well: Ask yourself whether the expenses are unplanned and uncontrollable. Only true emergencies that are both unplanned and uncontrollable should require you to stop contributing to your 401(k).

When you retire from your job

The ultimate end point to your 401(k) contributions is when you stop working. Remember, 401(k) plans are sponsored by your employer, so when you retire and stop working, your days of making contributions to your 401(k) plan are over. However, this may not be the end of your retirement savings journey.

What happens when you stop contributing to your 401(k)?

Halting 401(k) contributions might be financially necessary, but you should keep in mind what you’re giving up in exchange.

  • You stop reducing your taxable income. Your 401(k) contributions are made with pre-tax dollars from your salary, lowering your taxable income. This can either bump up your refund or lessen what you owe. If you aren’t making contributions, you don’t have the opportunity to reduce your taxable income. This might mean your tax return won’t be as high next year or you could end up owing money.
  • You could miss out on employer 401(k) matching contributions. If your employer makes matching 401(k) contributions, you’re missing out on the extra 401(k) pay bump. Regardless of how much or little your employer contributes, you won’t get to take advantage of the free money from matching contributions.

Keep saving when you stop contributing to your 401(k)

If you stop contributing to your 401(k), that doesn’t mean you should stop saving altogether. Keep saving in these other accounts if you have the money to spare:

  • High-yield savings account: If you want to put money away but still have access to it right away, try a high-yield savings account. APYs for these types of accounts are much higher compared to regular savings accounts: sometimes as high as 2.00% versus 0.10%, respectively. This type of account is good for building up an emergency fund or other types of savings that you can immediately tap into.
  • Certificate of deposit (CD): If you have the chance to allow savings to grow for a set amount of time, try a CD. You’ll deposit your funds into an account but won’t have access to it for a set term — sometimes six months, sometimes two years. In that time, you could earn a higher yield compared to a regular savings account or high-yield savings account, depending on the amount you deposit and where you make your deposit.
  • Taxable investment account: If you want to try out investing and have some extra cash to do so, try an investment account. A brokerage account is good for hands-on investors, while a robo-advisor is a good fit for hands-off investors or those who don’t have the time or knowledge to buy individual securities.
  • Individual retirement account (IRA): Whether you go the traditional or Roth IRA route, you can put money away into a personal retirement account that isn’t tied to your job. While the contribution limit for IRAs is lower than it is for 401(k)s, you can still put money away for retirement without using your employer-sponsored plan. This is also a good idea if you eventually leave your job (or lose your job) and need to transfer funds from your 401(k) into an IRA.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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How and Where Should I Open an IRA?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

You can open a traditional IRA or a Roth IRA from a wide variety of account providers, including banks and credit unions, brokerages and robo-advisors. Taking into account your retirement needs and your investing style will help you decide where to open an IRA. This guide aims to help you determine what kind of IRA is right for your goals and then show you where to open an account.

Should I choose a traditional IRA or a Roth IRA?

Traditional IRAs and Roth IRAs are the two main varieties of individual retirement account. Which one you choose depends on when you’ll need to start taking out money in retirement and certain tax considerations.

With a traditional IRA, contributions you make into the account reduce your taxable income, and money in the account grows tax-free over the years. The withdrawals you make in retirement are treated as taxable income. And required minimum distributions (RMDs) begin at 72 years of age — so whether you need the money or not, you must start taking minimum annual withdrawals from your traditional IRA.

Contributions to a Roth IRA are made after you pay income tax, and contributions do not reduce your taxable income. The money grows tax-free in the account, and withdrawals are free of income taxes in retirement. There are no required minimum distributions with a Roth IRA — you can even choose to leave the funds untouched in the account and bequeath them to your descendants in your will.

  • If you anticipate that your taxes are higher when you are making contributions than they will be in retirement, choose a traditional IRA. The money is pre-tax, and contributions help reduce your income taxes. Typically people in higher tax brackets should consider a traditional IRA, to reap the benefits of the tax deduction.
  • If you anticipate that your taxes are lower when you are making contributions than they will be in retirement, choose a Roth IRA: Pay lower taxes on the money you contribute now, and skip the higher anticipated taxes in retirement. Typically younger people should consider a Roth IRA when their income tax bracket is lower.

Where should I open an IRA?

Deciding where to open an IRA depends on whether you are a hands-on investor or a hands-off investor.

  • Hands-on investors understand markets, know what assets to include in their portfolios and have the skills needed to manage their portfolios over the long term. Time and patience are needed to be a hands-on investor.
  • Hands-off investors may be relatively new to markets or may not have enough experience to be comfortable managing portfolios themselves. Alternatively, a hands-off investor may not have the time necessary to personally manage investments.

IRA providers for hands-off investors

If you’re a hands-off investor, a good option would be to open an IRA with a robo-advisor. These low-cost, automated investing platforms assess your risk tolerance, determine your expected retirement age and ask other questions about your expectations. Your answers help the robo-advisor build a portfolio of investments tailored to your needs and goals — and once your portfolio is set up, the robo-advisor manages it for you. Savers with less investing knowledge and expertise can rely on a robo-advisor as a low-cost way to manage an IRA.

IRA providers for hands-on investors

If you’re a hands-on investor who wants to manage your own retirement funds, you should explore opening an IRA at an online brokerage. These conventional investing platforms let you select the securities and assets that make up your portfolio, which you actively guide through good market conditions and bad. It takes a little more time and effort, but those with skills and patience could yield higher returns.

What should I look for in an IRA provider?

As you go through the process of evaluating IRA providers, ask yourself these questions:

Are you a conservative investor, or are you comfortable with more risk?

Very conservative investors should check out banks and credit unions, which offer IRA savings accounts and IRA CDs. These deposit accounts are ultra-safe but low-yield investments that receive Federal Deposit Insurance Corp. (FDIC) coverage. If you are comfortable with more risk and want higher yields from your IRA, choose a brokerage account. Brokers offer a variety of market-traded assets, like stocks and ETFs. If you have a moderate risk appetite, you can open an IRA with a broker and choose fixed-income investments.

How much money do you have to invest?

Not all IRA providers have the same minimum investment thresholds. Robo-advisor Wealthfront has a $500 minimum balance requirement to open an account, while competitor Betterment has no minimum balance requirement. Some Vanguard funds require a minimum investment of $3,000. Personal Capital has a minimum investment threshold of $100,000.

How much do IRA providers charge in fees?

Wealthfront and Betterment charge a percentage of the total amount in your account as their annual management fee. Other platforms, like Blooom, charge a flat annual management fee. With a flat fee, the fee is a bigger percentage of your total portfolio at the outset, when there’s less money in your account, and then it becomes a smaller percentage of the total portfolio as your investment amount grows.

With a fee based on the percentage of assets you have invested, the amount you are paying in fees grows in lockstep with your balance. If you open an IRA with a broker, you could end up paying little to nothing in fees, as many offer fee-free or very-low-fee mutual funds and ETFs — although you’ll need to screen your investment choices yourself.

What assets do you want to invest in?

This comes down to what type of investor you are. Higher-risk securities include stocks and ETFs, while lower-risk choices include bonds and bond ETFs. Meanwhile, bank IRAs are virtually risk-free. Depending on your age and how much risk you’re willing to take, you may end up having a mix of many different types of securities. To be safe, diversify your portfolio and manage your asset allocation accordingly. See which companies offer you the best mix you’re looking for and which ones line up with your values and financial goals.

How to open an IRA

Nearly all IRA providers offer both traditional IRAs and Roth IRAs. Visit the website of your IRA provider of choice or download their mobile app, and complete the registration process.

With a broker, you will be asked to customize your own portfolio, although most brokers provide educational resources to help you choose. Younger investors usually choose riskier securities like stocks. The closer you are to retirement, the less risk you should take on, so choose more fixed-income assets.

How to fund your IRA

Although some companies require an account minimum upon opening, you’ll need to make regular contributions to see your IRA grow. You have the opportunity to fund your IRA a few different ways, including:

  • Paycheck deductions: You can set up automatic paycheck deductions to fund your IRA of choice. Talk to your employer to see whether they make this option available.
  • Monthly payments: If your employer doesn’t offer automatic payroll deductions, you can make regular monthly IRA contributions. Either handle the contributions manually as part of your monthly budget process or set up automatic payments from your bank account.
  • Rollover retirement plan: If you’ve recently switched jobs, you might have a 401(k) with your old employer. You can roll that over into an IRA. An IRA rollover requires several steps, depending on your old 401(k) and your new provider. If you have an old IRA, you can move that over as well. While you’re allowed to have multiple IRAs, your $6,000 contribution limit is for all of them — not just each one you have.

You can also have a mix of ways to contribute to your IRA. For instance, if you get a bonus at work and want to put it toward your IRA, you can make a one-time contribution on top of your regular payouts.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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How Much Should I Contribute To My 401k?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Deciding how much money to contribute to your 401(k) should be based on your desired retirement age, your annual spending needs, and your current savings. Establishing the right 401(k) contribution today helps ensure you put away enough money to enjoy your golden years in comfort. This guide offers pointers to help you decide the right amount to contribute to your 401(k).

How much should I contribute to my 401(k) every month?

To establish your monthly 401(k) contribution, determine the age at which you want to retire, estimate your annual spending needs once you’re retired and calculate how much money you’ve already saved.

For instance, if you’re currently 22 and aiming to have $1 million in your 401(k) by the time you’re 62, that means you have 40 years to save for retirement. Here’s what that might look like, depending on your income and contributions, figuring a 6% annual rate of return on your investments:


Contribution %

Employer Match

Starting balance

Years Invested

Total Balance



100% up to 3%






100% up to 3%




This doesn’t take into account raises, job changes, an increase in contribution (or a decrease, if you need to stop making them) and other factors. But it does give you an idea of how much your salary and contributions matter when building your 401(k).

It might be hard enough to stay current on your bills, let alone contribute to your retirement. You may want to adjust your retirement goals, like how much you’ll need in retirement or the age when you’ll retire. There are a few different ways to calculate this, like the 25x rule and the 4% strategy.

Use the 25x rule to determine your 401(k) contribution

The 25x rule is a determination of what you’ll be spending every year of retirement, and then multiplying that by 25. The premise of this is that you’ll need 25 times your annual expenses to live comfortably in retirement. When you figure out housing, transportation, living expenses, health care and other needs, you may find that you don’t need $1 million in retirement.

Use the 4% strategy to determine your 401(k) contribution

The 4% strategy is based on how much you’ll withdraw the first year of retirement and use that as a guideline for withdrawing every year after that. Let’s say you have $1 million in retirement, the first year you’d withdraw $40,000 (0.04 x 1,000,000). The next year, you’ll withdraw the same amount but adjusted for inflation. If inflation is around 2%, you’d withdraw $40,800 (0.04 x 1.02 x 1,000,000). Every year you’d continue to adjust for inflation on top of your $40,000.

What percentage of my income should I contribute to my 401(k)?

401(k) contributions are different for everyone, which means what works for some might not work for all. Earl Johnson, senior vice president and wealth manager at EverGreen Capital Management, said this figure is based on each person.

“I don’t usually discuss any rules of thumb because most people’s situations are so different,” Johnson said. “But I would say the first deciding factor is if your employer provides a matching contribution, you must contribute enough to get all matching funds.”

Johnson said that instead of creating a budget line item for our 401(k) contributions, your budget should start when your paycheck hits your bank account after your contributions have been made. This should be used as a guide no matter what your income is.

What about matching contributions to your 401(k)?

Matching contributions can be one of the biggest differentiators to your work-sponsored 401(k) plan. While it’s important to contribute as much as you can, employer matches can sometimes double your retirement savings.

“If you’re contributing 3% and your employer matches 3% dollar for dollar, you are in essence putting away 3% of your salary pre-tax for the benefit of a 6% contribution to your 401(k),” Johnson said. “For a person making $50,000 that’s a $3,000 annual contribution that literally cost you only $1,170 per year.”

Matching comes in a few different forms, like dollar-for-dollar matching and partial matching. Dollar-for-dollar matching is when your employer matches 100% of your contribution up to a certain percent. Partial matching is when your employer matches a portion of your contributions. While you’re still getting free money from your job, it’s not as much as a dollar-for-dollar match.

While having an employer match is one of the biggest benefits of a 401(k), not all companies offer this. Ask your company if they have a matching program and how you can take advantage of it.

Catch-up contributions and your 401(k)

If you didn’t make enough money to max out your 401(k) contributions early on in your career, or you put off higher contributions to focus on other financial necessities, you might contribute to catch-up contributions.

These are contributions you can add along with your regular contributions, as long as you’re 50 years of age and older. This is important because IRAs cap your catch-up contributions at $1,000. For 401(k)s, that limit is $6,500.

“Investing more of your income while working by maximizing allowable contributions can help increase your likelihood that you can sustain a healthy income in retirement,” Johnson said.

Everyone’s retirement needs vary, so what you need to save now could be different compared to someone else’s. Those with higher wages might want to keep up the same lifestyle in retirement, while others might downsize their home or limit their spending now that they’re not working. Catch-up contributions could help you sustain your current lifestyle or just help you make it through retirement without running out of money.

How much can I contribute to my 401(k)?

For 2020, the 401(k) contribution limit is $19,500. People who are 50 or older may make additional catch-up contributions totaling $6,500 a year. Employers may contribute up to $37,500 a year. All in, the maximum annual contribution in 2020 for someone younger than 50 is $57,000, while the maximum for someone 50 or older is $63,500.

If you can max out your 401(k) contributions without sacrificing the standard of living you want or need, you should consider doing so. Putting as much as possible into your 401(k) now can help guarantee income security in retirement.

What if you contribute too much to your 401(k)?

Putting too much money away in your 401(k) could incur penalties. If you’re aware of the over-contribution, tell your plan administrator as soon as you’re aware of it. You might be able to change some of the contributions to the following year to avoid tax implications.

This should all be handled before Tax Day to avoid paying taxes on the money you over-contributed. Penalties include getting taxed twice. You’ll get taxed for the year you contributed the money, and then again when the deferral is distributed.

Will vesting impact how much I contribute to my 401(k)?

Vesting is when a company offers matching 401(k) contributions, but you don’t immediately own that money. Instead, you’ll need to wait until you’re “vested,” or have been with a company for a certain period of time, to take ownership of the matching contributions — what’s called “fully vested” in retirement lingo.

Vesting varies by company, but many vest their matching contributions in three to five years — this process is called the vesting schedule. Until you are fully vested, you might be able to cash out on some of the matching contributions, but not all. For instance, you could be 20% vested after one year, then 40% vested after the second one. If you leave after two years, you’ll get 40% of your employer’s matching contribution. If you wait until you’re 100% vested, you’d have to stick around for at least five years.

If you leave a company before you’re 100% vested, you can take all of the contributions you made with you. However, you’ll lose the firm’s nonvested matching contributions.

Do you have a 401(k)?

If you’re not sure what your company offers for retirement plans, ask your human resources department what your options are. You might qualify for a work-sponsored 401(k) and your job might even match contributions. Even if you don’t get a company match, contributing as much as you can to a 401(k) is a great investment in your future.

If you don’t have a work-sponsored 401(k), it’s a good idea to explore other options, including IRAs. Even if you have a 401(k), an IRA is a good personal retirement plan to have in the event you leave your current job and need a place to move over your funds. Regardless of your setup, it’s important to contribute to a retirement plan for your future.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.