Should You Contribute to The TSP or a 401k Without an Employer Match?

The economic crisis has affected many companies here in the US, and as a result, many companies are slashing their 401(k) match and other benefits to conserve cash. The bad news is employees are losing out on free money. You should reexamine your situation any time your benefits change. You’ve probably heard that not contributing to a company-matched 401(k) is like leaving free money on the table. If your employer matches your contributions, it’s a no-brainer to max out that 401(k), but what if you aren’t getting matched?

Is it still worth contributing to that 401(k) or should you use a different account?

Your retirement is one of the most important things you can plan for. This article will look at some of the various factors of a 401(k) employer match and what you should do if your employer doesn’t match your contributions.

What is a 401(k) Employer Match?

401(k) accounts were introduced in 1980, and employer matching programs have become very common employee incentives. The idea of employer matching programs is simple: they will contribute one dollar for every dollar you put into the account, up to a certain amount. Every company is different, and all of them will offer a different matching amount, and matching limit, on how much they will contribute every month. These employer matching incentives are one of the best ways to boost your retirement account and help you reach your retirement dreams. Every year, I see many people asking the same question, “what is a good 401(k) match percentage?” but the answer isn’t as simple. The amount the company matches will vary drastically depending on the company. Some companies don’t offer any matching at all, while others will match 50 cents for every dollar you put in. According to some surveys, most companies have a matching program that will contribute up to an average of 4%-6% of an employee’s salary. Some companies will continue to match contributions to up to 6% of the annual salary. It’s difficult to say what a “good” match is. Anything is better than nothing, but anything that gets close to the average is good.

Pro Tip: Having a retirement plan is great, but getting the most out of your retirement is even better. Tools, like Blooom, help manage 401(k)’s to ensure investors are getting the most bang for their buck.

Should You Contribute to a 401k Without an Employer Match?

In most cases, it is still a good idea to contribute to a 401(k) plan, even without an employer match. Here are a few benefits to continuing your 401(k) contributions:

Automatic and guaranteed savings

401(k) contributions are made automatically with each paycheck – you never have to worry about transferring money, writing a check, mailing a letter, etc. Automation guarantees you will make your investment on time.

Lower taxable income

Contributions to a Traditional 401(k) plan lower your taxable income because the contributions are invested with money that has not yet been taxed. This leads to the next benefit:

Tax-deferred growth

Investing in a Traditional 401(k) plan means your contributions will grow without the drag of taxes until you make your withdrawals. Your money gets taxed when you withdraw it, and possibly at a lower tax rate if your tax bracket is lower in retirement than it is now.

Other Considerations

It is usually a good option to continue contributing to a 401k without an employer match, but there are some other factors you need to keep in mind.

Expenses and fees

Many 401(k) plans have higher fees than you will find for comparable funds outside of the 401(k) plan. You may find it less expensive to invest on your own than your 401(k) plan. If that is the case, consider investing in an IRA so you can continue investing in a tax-advantaged retirement plan.

Investing in a 401(k) or IRA

If you are eligible, you may decide to invest in an IRA instead of the TSP. Here are some differences between Roth and Traditional IRAs. You can open an IRA at almost any financial institution and find very inexpensive options at places such as Vanguard, Fidelity, T. Rowe Price, etc.

Retirement contributions and income limits

You will need to pay attention to the 401(k) contribution limits and Roth and Traditional IRA contribution limits. Be sure to note the associated income limitations of each. For example, suppose you are eligible for an employer-sponsored retirement plan. In that case, deductible IRA contributions begin to phase out for single filers at an AGI of $89,000 and $126,000 for married filers. If those income limits affect you, you may wish to invest in a Roth IRA or a non-deductible Traditional IRA.

Continue Investing

Just because you no longer receive free money doesn’t mean you should use that as an excuse to stop investing. Retirement investing is an important part of financial planning, and you should continue investing even without a company match. The free money may be gone, but the tax advantages remain. The sad truth is that most American workers don’t have nearly enough money saved to have the retirement they want. If you aren’t on track to reach your retirement goals, don’t panic. Maximizing your 401(k) is just one of the many of steps that you can take. Unless you want to work until the day that you die, you must start investing your money as soon as possible. The bottom line is, if your employer offers any type of matching program, then you should always take full advantage of that program. If you no longer have matching, don’t worry. You should still max out your 401(k). You can then use other accounts to supplement that account.

Alternatives to a 401(k)

Many people who invest in 401(k) accounts to expand their portfolios through alternative investment means. Below are a couple of great options for diversifying their portfolios.

Invest in a Roth IRA

The Roth IRA has quickly become a beloved investment vehicle for millions. The main reason for this is because the money you invest in a Roth IRA account has already been taxed. On most investments, investors pay taxes on the monies when they withdraw them in retirement. For many, this translates to paying higher taxes when they withdraw the funds because they are earning more at that time in life than they were when they originally invested the money. Eliminating this tax burden translates to more money for retirees. Ally Invest is a popular option for those looking to invest in a Roth IRA.

Learn More About Ally Invest

To learn more about this investment method, check out my Roth IRA Guide.

Invest in Real Estate

Returns in the real estate market can be high. However, the risk and cost of investing in this market have disenfranchised numerous investors from engaging in this space. Several companies, such as Fundrise, have emerged over the past few years that have given individual investors who previously could not take advantage of this market to invest in commercial real estate developments through Real Estate Investment Trusts (REITs). Fundrise allows individual investors to pool their money to collectively invest in commercial real estate. This eliminates the need for a large sum of cash and spreads out the risk.

Learn More About Fundrise