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Never Stop Contributing to Your 401k

Even in a financial crisis, you should keep up your contributions

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Some idiot (pardon my candor) at one of the other major financial sites just wrote an article explaining that low and middle income people should stop contributing to their 401k if they experience a personal financial crisis. The author clearly knows nothing about tax or bankruptcy law and the advice, in my opinion, is nothing short of journalistic treason. If you don't know the subject matter at hand, the responsible thing to do is to put down your pen, and do some research. Real people's lives could possibly be affected or influenced if you state something as fact rather than just provide information.

What is the problem? Here's why you should always - and I mean always - contribute to your 401k, even if you are falling behind on your bills.

  • Contributions to your 401k are often tax-deductible. This means that if you instead choose not to put those dollars aside, the Federal and state governments are going to take a bigger chunk of your pay in income taxes. Not only will you end up with less money in your retirement account, you'll end up with less cash in your hand today. It's sort of like killing the chicken for meat now when you could live off the eggs for a much longer time.

  • Many employers offer matching contributions to money put into a 401k by employees. If your firm were to give, say, a dollar-for-dollar match on the first 3% of salary, someone making $40,000 per year could get an extra $1,200 in pay - tax deferred - simply by making contributions to their 401k. If you stop, not only are you going to pay the higher taxes we discussed just a moment ago, but you are going to forfeit this money forever.

  • If you are unfortunate enough to have to declare bankruptcy, most courts will protect your retirement accounts, including your 401k. That means that the money that has been put aside will stay there while the rest of your assets are liquidated or reorganized. if you are really in trouble, you should want to put as much as possible away in this relatively safe place, beyond the reach of many creditors.

  • Over long periods of time, the tax advantages enojoyed by a 401k can result in far more wealth than if you had held your stocks or mutual funds in a brokerage account. You lose all of the time value of money compounding that would have gone to you.
At the very least, as Suze Orman has said, you should be making contributions up to the amount of matching offered by your employer. That should be a no-brainer.

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