Manage your 401(k) in cash

By Scot Herrick | Personal Finance

Mar 11

Part of managing your career is managing your 401(k). Right now, your 401(k) is looking ugly. Should you stop contributing to your 401(k)?

Here are three reasons to keep contributing – and one reason you might stop.

401(k) has company match

Without going crazy on percentages, if your company is contributing a company match to your 401(k) contribution, it will most likely be the largest gain on your money in your portfolio. Even in the greatest bull market, the company return on your contribution will most likely be the biggest return on your investment. Now, in these tough times, many companies are starting to pare back or “temporarily” remove the company match. For companies, it is a direct expense saving to cancel the contribution. Of course, they don’t offer pensions anymore, so this is a kick in the teeth for savers.

If your company does a company match, you should contribute – it will be the most money you will make on your investments this year. Especially this year.

401(k) is tax deductible

Taxes are a fact of life, but 401(k) plans are the perfect Cubicle Warrior tax avoidance choice we have. All the money you place into your 401(k) plan is deducted from your earnings up to the limit of the contribution. This is traditional 401(k) plans; Roth 401(k) plans have contributions taken after taxes.

401(k) can go to cash accounts

One of the misconceptions about 401(k) plans is the money has to be invested. Not for most plans. Most plans have a “money market” alternative for you to park your money in while the market tanks. You can go to your set-up pages in the plan and change your contribution from whatever mutual fund or bond funds you may have to a money market account. Make sure you get the company match to go into cash as well if this is what you want to do. Putting your money into the 401(k) money market account preserves your contribution. Just because the market is tanking doesn’t mean you need to put in $100 to only lose $20 of it in a couple of months. And just remember, in 2005, some wanted to privatize Social Security. Good that didn’t work out…

But if you see a layoff coming and need cash reserves…

I’m not a financial adviser, but these are common sense reasons to put money into your 401(k). But there is also a good reason to NOT continue your contributions. That reason is you believe you will be laid off by your company and you want to build your cash reserves. I’ve done that when I’ve been told of a layoff, but I have usually held on to the contribution until then. But some families are financially stressed and having the contribution as part of more accessible savings makes some sense.

Just make sure you save the money. No good pulling your contribution to your retirement and then blow the contribution on something trivial.

Having savings and managing your 401(k) helps you survive a job layoff. Managing your finances is critical to your emotional well-being in case you are laid off. There is a lot to be said for money in the bank in this economy.

How many of you have had their company match removed from the 401(k) contribution?