Should You Make 401(k) Contributions if There is no Match?

We all know to pay off debt and build an emergency fund. Usually, the next step is to maximize any available 401(k) match.

I turned off all 401(k) contributions after losing my company match

Life always come up and it’s easy to neglect the 401(k). I work in the energy industry which has been in a downturn for over two years. My employer quickly halted the company match on the 401(k). This was disappointing, but I knew there would be tough times ahead.

At the same time, I had also recently bought a house in a high cost-of-living area. I used a piggy back 80-10-10 loan and planned to quickly pay it off in less than five years.

Along with other unexpected expenses that come along with buying a house, my budget was rocked. I was still paying into my 401(k) with 0% company match. I decided to discontinue all 401(k) contributions and redirect them towards my house.

Now two years later, I have payed off my piggyback 80-10-10 loan. I refinanced my mortgage and lowered my interest payment substantially. I built up my emergency fund and things seemed pretty great. I wasn’t paying into my 401(k) at all, but with no company match, I didn’t think I should.

I was leaving money on the table

Meanwhile, I caught on to dividend growth investing and began saving/contributing in a regular, taxable stock trading account. My account grew and grew, but I had a nagging voice in my head that I wasn’t doing something right.

It was time to revisit my 401(k). Fewer investment options and no company match were not appealing to me. However, my whole dividend growth investment strategy was geared toward building an income stream of dividends. I realized the available 401(k) funds paid dividends too.

The tax advantages would be very small though, right? My taxable dividend income would only be taxed at a low 15%. If my overall portfolio dividend yield is 3.0%, taxes biting 15% out of that would be almost negligible.

There are good reasons to pay taxes and not contribute to a 401(k). If someone was saving up for a house down payment or expected large expenses, a taxable account allows withdrawal any time without penalties.

I already had a house, and I already had an emergency fund built up. I had no excuses. I had to do the responsible thing for my own self and begin my 401(k) contributions again.

In the past, I contributed to a 401(k) and never looked at that money again. This time around, I check my account after each pay period. Tracking my progress keeps me inspired. I am contributing less now to my taxable stock account, but I am fortunate to be maxing out my 401(k) limit. There’s still no company 401(k) match, and I don’t expect one any time soon. The good news is that my account (and my future income stream) is growing slightly faster thanks to the portion that is growing tax-free in my 401(k).

Looking at the numbers

Let’s look at an example.

Let’s say I contribute $1,000 to my 401(k), and my friend contributes $1,000 to his regular taxable stock account. Let’s also say we both get 3% in annual dividend yield and we both reinvest our dividends. Only he has to pay 15% tax on his dividends received, so he reinvests a little less than I can.

After the first year, my account grew $30 and his grew $25. $5 is hardly any difference he says, and he also likes having immediate access to that money if he were to need it.

The years go on and no one makes any additional investments. The dividends are reinvested and both accounts grow. My taxable friend has grown his initial $1,000 into a nice $1,614 after 20 years. He wants to know how I am doing.

I reached $1,605 after 17 years. I can get almost a 3-year head start on him in retirement!

Or, I can keep my money in for 20 years like he is doing. After year 20, my original investment will pay $53/year in dividends, and his will pay $41/year in dividends.

That fraction of a fraction of a percent really adds up when it comes to multi-year growth and reinvestment. Everyone’s situation is different, but I’m glad I am catching up on 401(k) investments this year and hope to max it out every year.

I haven’t even mentioned one of the biggest 401(k) benefits. I was able to deduct that original $1,000 investment from my taxable income that year. Even without considering the initial tax write-off, or a company match, the 401(k) outperforms regular taxable investing after a number of a years.

Playing 401(k) Catch-Up

Photo by Dafne Cholet

I started 2017 with no 401(k) contributions

Since focusing on retirement saving a year ago, I’ve aimed to maximize my tax-sheltered options. My company provides a 401(k) with no match. I can still benefit from it in the form of a huge tax deduction up front along with tax-free dividend growth within the account.

I had lots of room to improve my saving habits. My company discontinued my 401(k) match a few years ago around the same time I bought my house. I discontinued my 401(k) contributions for a period of time. I only decided to resume 401(k) contributions in April of 2017 (this year).

My income allows me to max out my 401(k). In April, I set my employee 401(k) contribution to $1,500 per month, which would come out to the IRS maximum of $18,000 per year.

At this point, I gave myself a huge pat on the back

Great job, Mr. Dividend Dozer. I was now contributing what I thought was the maximum I could. Four months went by and I felt great about my discipline in saving. And then in August, I realized I was not actually maxing out my 401(k). In fact, I would have been leaving over $4,000 of potential tax-deductible investments on the table.

Realizing another beginner mistake

After realizing I did not max out my Roth IRA for 2016, I am glad I realized my 401(k) mistake while I still had time to correct it. I only began contributions in April. Contributing $1,500/month amounts to $18,000 over twelve months, but I only had April-December to work with for 2017.

I bumped my monthly contribution to $2,466 for the last half of August through the end of the year. My 2017 401(k) will be maxed out. I’ll have to contribute less to my taxable accounts, but this is another step towards financial independence. When 2017 is over, I can scale back my 401(k) contributions to $1,500 per month. I look forward to that! It might be painful now, but I will be happy to maximize another one of my 2017 tax-sheltered accounts.