Almost 1 in 4 Americans Plans to Decrease 401(k) Contributions for More Disposable Income. Here's How That Might Hurt You Financially in the Long Run | The Motley Fool (2024)

FAQs

Why are 401ks losing so much money? ›

At least a portion of your 401(k) is likely exposed to the stock market, which is what helps it to grow over time. However, like with all investments, if the stock market dips—you could instead see declines in value from time to time, which may lower your 401(k) balance at certain points along your savings journey.

You should aim to contribute as much as you can to your 401(k) regardless of economic events. A recession is one of the best times to contribute to your 401(k) because the stock market is usually down. In other words, you can buy your investments on sale.

Money pulled from your take-home pay and put into a 401(k) lowers your taxable income so you pay less income tax now. For example, let's assume your salary is $35,000 and your tax bracket is 25%. When you contribute 6% of your salary into a tax-deferred 401(k)— $2,100—your taxable income is reduced to $32,900.

But if you cut your retirement plan contributions to free up more money for near-term wants, you might end up short on cash to cover your long-term needs. So it's best not to reduce your retirement plan contributions unless you truly need that money for essential bills.

Don't panic sell

If you're young and your investments are well diversified, the best thing to do when you see your 401(k) or IRA losing value may be nothing. All investments have ups and downs, and it's never wise to judge long-term growth potential by recent performance.

The value of 401(k) plans is based on the concept of dollar-cost averaging, but that's not always a reliable theory. Many 401(k) plans are expensive because of high administrative and record-keeping costs. Nonetheless, 401(k) plans are ultimately worth it for most people, depending on your retirement goals.

Given a recession is the most likely outcome by 2024, it's important to keep contributing to your 401(k) during downturns. Take advantage of lower prices to build a large 401(k) portfolio for retirement. After all, you won't be tapping your 401(k) until after age 59.5 anyway without penalty.

Is It OK to Retire During a Recession? Retiring during a recession is certainly possible. If a client has diversified their income, saved enough in their retirement plan, trimmed costs, and maintained their investments, then retiring in a recession may still make sense.

If the dollar collapses, your 401(k) would lose significant value. Exponential inflation would result if the dollar collapsed, decreasing the real value of the dollar compared with other global currencies, which, in effect, would reduce the value of your 401(k).

In general, Roth 401(k) withdrawals are not taxable, provided the account was opened at least five years ago and the account owner is age 59½ or older. Employer matching contributions to a Roth 401(k) are subject to the account owner's income tax rate.

At what age is 401k withdrawal tax-free? ›

The IRS allows penalty-free withdrawals from retirement accounts after age 59½ and requires withdrawals after age 72. (These are called required minimum distributions, or RMDs). There are some exceptions to these rules for 401(k) plans and other qualified plans.

Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.

Cannot exceed the lesser of $69,000 for those under 50 ($76,500 for those 50 and up) or 100% of employee compensation. » Learn more: Use NerdWallet's free 401(k) calculator to see how your contributions add up.

If you were planning to retire in the very near future, you may not want to add another year or two of work. Check to make sure you're not overexposed to riskier equity investments. Instead of cutting your contributions, you may consider shifting over to less-risky investment choices like stocks and bonds.

Since 401(k) contributions are pre-tax, the more money you put into your 401(k), the more you can reduce your taxable income. By increasing your contributions by just 1%, you can reduce your overall taxable income, all while building your retirement savings even more.

Human resources provider Alight found that net trading activity in 401(k) plans has quieted down, falling to a rate of 0.82% last year from 1.27% in 2022 — and down substantially from 3.51% in 2020, the year the pandemic slammed into markets.

Diversify your portfolio

Diversification is a key aspect of an investment portfolio, especially for long-term accounts like 401(k)s. Diversifying your portfolio across different asset classes and markets also helps to reduce exposure to one particular segment of the market.

If your 401(k) is losing money, it's important to understand why, as well as consider how long you have until you plan to retire. If you're years and years away from retirement, you likely have time to regain that money in your 401(k)—remember, it's a long-term investing strategy.