In today’s tough economy, many employers have had to cut back on worker benefits. Some companies have started to reduce the amount they match on 401(k) accounts, while others have stopped matching contributions altogether. Once your employer stops matching, your 401(k) plan becomes significantly less useful as a retirement tool. If you find yourself in this situation, you have a few options to consider.
1. Switch to a Traditional IRA
A Traditional IRA is set up just like an unmatched 401(k), but it may give you access to a wider range of investments or a lower annual fee than your existing work plan. With a Traditional IRA, you receive a tax deduction for your contributions and taxation on your investment gains is delayed until you make a withdrawal. Switching to this type of plan may be a good option for you if your current plan does not meet all your investment needs or charges high fees.
2. Switch to a Roth IRA
Another good alternative is a Roth IRA, which allows tax-free investment gains as long as you do not make a withdrawal before retirement at the age of 59 ½. Often investors do not have enough money to contribute to both a 401(k) and a Roth IRA, so they stick to their company plan to get the match. Once the match goes away, a Roth IRA can be a much better choice to reduce your future tax bill. The downside of a Roth IRA is that the benefits are delayed until after retirement – you do not receive a tax deduction for contributions.
3. Consider a self-directed IRA
The self-directed IRA is an often underused investment tool that allows you to expand your portfolio beyond stocks and bonds. This account allows you to invest in real estate, personal loans, business partnerships and other so-called alternative investments, which are not available under company 401(k) plans. There is both a Traditional and Roth version of the self-directed IRA so you can pick the tax arrangement that best suits your investment goals.
4. Keep using the old 401(k)
Depending on your personal goals and circumstances, keeping your company 401(k) might be your best bet, even without the match. If you stick with the plan, you would continue to receive the tax deduction for your contributions and taxes on your investment gains would be delayed until retirement. In addition, you are able to invest more per year through a 401(k) than through an IRA, which leads to a larger tax deduction. If the fees on your 401(k) are reasonable and you are happy with your employers investment selection then there is nothing wrong with continuing to use the unmatched plan. Just make sure that you fully consider other options to be sure this is the best way forward.
How to transfer money to your new plan
If you decide to open a new retirement plan, you should stop contributing to your unmatched 401(k) plan and put that money towards the new plan.
But keep in mind that it will not be easy to transfer your old 401(k) savings to the new plan as long as you are an employee for the company that set up the original plan.
Companies often restrict 401(k) withdrawals while you are still an employee and, even if you are able to make a withdrawal, it’s usually not a good decision. You would owe income tax on any money you take out, as well as a 10% penalty if you are younger than 59 ½. The taxes and penalties would likely cancel out any financial benefit you would get from the new retirement plan.
The best time to transfer your money is when you either leave the job or your employer terminates the 401(k) plan. In this case, you can roll over your 401(k) balance to another retirement plan without paying the 10% penalty. If you roll over to a Traditional IRA, you won’t owe any taxes on that amount. However, if you roll over to a Roth IRA, you will need to pay income tax on the money transferred. Either approach would get your savings out of your 401(k) into another, more effective retirement plan.
The match benefits of an employer 401(k) are often the most rewarding part of the plan. Once that benefit disappears, you would be wise to consider other options to get you on the path to your retirement goals.