People in a difficult financial situation often consider stopping contributions to their 401(k) retirement plans either permanently or temporarily. U.S. News & World Reports gives eight examples of when you might want to put retirement savings on hold. Many financial advisers warn not to stop contributions to your 401(k) unless your company has stopped matching your contributions or you are close to retirement age.
However, some employees are temporarily stopping their 401(k) contributions to put money into savings instead. The process is fairly simple and can be done through the human resources department at your place of employment.
Check With Human Resources
Go to your HR department to find out how much money you will get per paycheck if you stop contributing to your 401(k). Remember that 401(k) contributions are made before tax is taken from your paycheck. Because of this the amount of money you will get back in your paycheck will not be equal to what you were contributing.
In addition, if your employer matches your 401(k) contributions, beware you could be losing a lot of money when you stop contributing. Savings accounts usually can't compete with the rate you will get when your employer matches your contribution. When you put money into a 401(k), you earn compound interest, which means you'll not only earn gains on the money you put into your account, but you'll earn benefit from all of this money growing for decades.
Fill Out the Paperwork
Fill out any paperwork required to stop contributions to your 401(k). Employers have different processes for making changes to pay, so you will need to ask your human resources representative what your company requires. You might be able to do this online if you have a company intranet, specifically an employee portal.
You will need a password if you did not set up your access when you joined the company. HR can help you, or you might be able to generate a new password or get access using your Social Security Number, employee number and/or other information.
Open a Savings Account
You'll need to open a savings account at the bank of your choice if you do not have one already. Shop around for savings account rates. Sometimes online banks will offer better rates than your neighborhood bank.
You should check to see if you can have money automatically deducted from your paycheck and put into your savings account. If you're saving money for a particular purpose or goal, such as a downpayment on a new house, higher education expenses or a six-month emergency fund, it can be useful to create a separate account in addition to one you may already have.
Other Options for Saving
Another useful way to add to your savings cash flow is to use automatic savings apps. These apps help you save money incrementally as you go about your usual daily spending.
If you want to earn more interest than a savings or checking account pay, look into a certificate of deposit. These offer a small amount of extra interest, but might tie up your money for six months or longer. Make sure to check savings, checking and CD rates at credit unions, which are often higher than at commercial banks.
U.S. Treasury Department Series I bonds offer a higher, guaranteed interest rate, which changes every six month. From May to October 2022, for example, they pay 9.62 percent. You can't cash the bonds for one year, you are limited to $10,000 per person (unless you have a tax refund, then you can buy another $5,000) and you must purchase within a specific window.
- Shop around for savings account rates. Sometimes online banks will offer better rates than your neighborhood bank.
- If your employer matches your 401k contributions, you could be losing a lot of money when you stop contributing. No savings account rate can compete with the rate you will get when your employer matches your contribution.
Mykal May has been writing professionally since 1992. She has published work in a number of print magazines including Brio and Pockets and for various Web sites. She has a Bachelor of Arts in writing and a Bachelor of Science in family relationships from Central Missouri State University.