What If My Employer Doesn’t Match My 401(k) Contributions?

Should I continue to make contributions to my 401(k)? Is there something else that I should make contributions to instead?

As you may recall, the recommended order for retirement savings contributions is normally as follows:

  • 401(k) contributions up to the amount that the company matches
  • max out your Roth or traditional IRA contributions for the year (as applicable)
  • max out the remainder of the available 401(k) contributions
  • make taxable investment contributions

In the situation where your employer doesn’t match your contributions to a 401(k) plan, the order of contributions is more appropriate if you bump up the Roth or traditional IRA contributions.  In other words, just eliminate the first bulletpoint.

Now, the choice of Roth IRA versus the traditional IRA for your contributions is dependent upon your income and the tax impacts.  For example, you would not be eligible to make a deductible traditional IRA contribution if your Modified Adjusted Gross Income (MAGI) is greater than $112,000 (if you’re married and filing jointly), or $68,000 if you’re single. (Contribution limits are for 2012 tax year.)

Since the deductible traditional IRA has the ability of being deducted from your income, making your contribution there could decrease taxes.  If you’re in a position to take advantage of this, you should probably go this route.  In the case where you’re married and your spouse isn’t covered by a retirement plan – either he doesn’t work outside the home or his employer doesn’t have a retirement plan – you can make a deductible IRA contribution for your spouse as well if your MAGI is less than $183,000.

On the other hand, if your MAGI is greater than $112,000 (MFJ) or $68,000 (Single), a Roth IRA contribution might be the best first option for retirement savings contributions.  The Roth IRA contribution is available to you if your MAGI is less than $183,000 (MFJ) or $125,000 (Single).  The Roth IRA contribution doesn’t reduce taxes for you currently – but in the future your distributions from the account can be tax-free if qualified.

If you don’t fit into those income categories, you still have the option of making non-deductible contributions to a traditional IRA for the tax year.  Again, there’s not a tax benefit in the current year, but there are benefits to making such a contribution – such as the ability to convert the funds from this traditional account to a Roth IRA later – that will make the contribution worthwhile.

The reason that the use of either a Roth IRA or a traditional IRA is the first choice (if available to you) over a non-matched 401(k) plan is because with the IRAs, you have much better control over your costs, investment choices, and fewer restrictions on non-qualified distributions.

The 401(k) still offers the greatest amount of tax-deferral – up to $22,500 if you’re over age 50, $17,000 otherwise – versus a maximum contribution of $6,000 ($5,000 if under age 50) for the IRAs.  This is the reason that the 401(k) account is still a good choice for making retirement savings contributions, even if your employer doesn’t match your contributions. So if you have more money to contribute to your retirement savings than the initial $5,000 (or $6,000 if over age 50), the 401(k) should definitely still be a part of your plan.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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