5 People Who Shouldn't Invest in a 401(k)
1. You don’t have a personal savings account that covers 6-9 months of bills and expenses. Experts say you should have at least 3-6 months saved in case of an emergency, but more and more people are moving toward 6-9 months as the benchmark. You need to have liquid, readily available cash to cover expenses if you lose your job or are in a pinch. Contribute here first before your 401(k).
2. Your company doesn’t match your contributions. If your company isn’t matching contributions there are other investment strategies you can use to save for retirement, that gives you a better idea of how much you will have when you do retire. Since your 401(k) is directly connected to the market conditions in 30-40 years, which is completely unpredictable, choose more conservative saving vehicles.
3. You have a lot of debt. Don’t forget that your debt’s interest is compounding just as much as money that’s sitting in savings. If you have a substantial amount of debt with icky interest rates you’re better off chiseling away at it early than investing it in the market.
4. You’re saving for the downpayment of a house. Typically 401(k)s allow a penalty free early withdrawal for those who have not been previous homeowners in the past two-years, which is awesome for first time buyers. However, the catch is only $10,000 of the early withdrawal avoids the 10% tax penalty on the funds, which means that you’ll be paying an additional 10% tax on top of your additional income tax (which is determined by your tax bracket on those funds).
5. You need cash readily available. Money put into your 401(k) should not be touched until the age you can withdraw without penalty. Open up a savings account at Fidelity or ING. It usually takes 2 or 3 days to electronically transfer funds back and forth which means it’s there when you need it, just not when you’re at the ATM. Although this vehicle isn’t ideal for retirement as its taxed as ordinary income tax every year, it’s a great way to start saving that chunk of change you can eventually use to open an IRA. Consider money-market savings accounts too, as they typically earn higher interest rates and are still less risky than stocks invested in at the beginning of 401(k)s.
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