Even if you avoid being laid off as the recession deepens, there is another cut to worry about: the loss of your employer’s 401(k) match.
In recent months, such companies as Motorola Inc., General Motors Corp. and FedEx Corp. have announced plans to suspend contributions to their 401(k)’s. And more companies are expected to make cuts in the coming year, according to a recent survey by Watson Wyatt, a global human-resources consulting firm.
Suspensions often are temporary. FedEx, for example, expects to stop its contributions for one year. But with the carrot gone even temporarily, you may be second-guessing your participation in an employer-sponsored plan.
Don’t make any changes, however, before considering a few things.
Are you a disciplined saver? When you participate in a 401(k), your contributions are pulled automatically from your paycheck, which Roger Wohlner, a financial adviser in Arlington Heights, said is just as critical, if not more so, than the employer match.
“The key for most people is to stick to a plan,” he said. “While it’s frustrating when you lose the match, a bigger fact is you’re still saving.”
To be sure, an employer match is valuable. Someone earning $50,000 per year could qualify for as much as $1,500 from his employer, assuming the typical match rate of 3 percent.
Many people, however, wouldn’t save that money if it weren’t for the automatic paycheck contributions that are the hallmark of the 401(k). Give up on the 401(k) and you could set yourself up not to save at all.
Are there better investment choices? Disciplined savers could set up automatic contributions to an individual retirement account. But you need to have certain conditions to make it worthwhile.
*You have terrible investment choices in your 401(k): Generally, 401(k) plans offer a limited selection of investment options. And sometimes those options are not good. They may charge steep fees, for example, or have poor track records. Said Bob Mecca, a financial planner in Mt. Prospect, “I’ve seen some really bad choices in 401(k)’s.”
If that’s the case for you, an IRA, which gives you the pick of thousands of investments, may be worthwhile. Especially if you clear this next hurdle:
*You are single and make less than $65,000 in 2009, or you’re married and earn less than $109,000. Like a 401(k), an IRA lets your earnings grow tax-deferred. But you also can take a full or partial deduction on your contribution if your income falls below the caps mentioned above. This feature is similar to 401(k)’s, which allow you to put money away pretax. And today, with cash tight, getting a tax deduction upfront can be a big help as you try to save.
What is the difference in tax savings? You can see for yourself how big a tax savings you receive with either a 401(k) or IRA. Simply multiply your annual contribution by your federal income tax rate. Use last year’s tax return to determine your bracket.
Here’s an example that Mark Luscombe, principal tax analyst at CCH, a tax-software provider, helped calculate.
A single person who makes $50,000 and contributes 10 percent of her salary to a 401(k) in 2009 would save $1,250 in taxes. (Her income, when adjusted for a personal exemption and the standard deduction, places her in a 25-percent tax bracket.) The savings would be equal if she contributed the full amount allowed, $5,000, to an IRA.
If she makes $75,000, she can no longer take the deduction for her IRA contribution. But if she continues to put 10 percent of her salary in a 401(k), her tax savings rises to $1,875.
In this case, she saves more through the 401(k), $7,500 instead of the maximum $5,000 in an IRA, and she receives a break for doing it.
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E-mail Carolyn Bigda at yourmoney@tribune.com.
