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When NOT to Put Money in Your 401k

November 7th, 2007 · Leave A Comment

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The end of the year is coming on rapidly. Is this the year you finally take your accountant’s advice and max out your 401k up to the government-allowed limit? If so, you’ve only got a few more weeks to act. After all, it’s free money. Free money people! How many times do you have to hear it?

But are there situations when you don’t want to max out your 401k?

Personal Finance webblog Wise Bread has a detailed post up describing situations where you might not want to max out your 401k. The long and short of it is, if you’ve already been making some contributions this year, there are certain circumstances where it might not pay to top off the 401k. Debt, especially credit card debt, can be a big factor. After all, what sense does it make to keep contributing to your retirement while your credit score is in danger of falling off a cliff?

Some other examples:

First, does tax-deferral make sense? Only if your future tax rates will be lower than your current tax rates(…)

Second, when are you going to want the money? Even though it’s possible to borrow money from a 401(k), if there’s any significant chance that you’ll want the money before retirement, you’re probably better off keeping the money out of any of these tax-deferred plans(…)

The article has plenty more in the way of tips and examples. If you’re nearing the top of your contribution limit, you might want to read the article before going ahead and maxing out.

When NOT to Put Money in Your 401k (Wise Bread)

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Tags: Finance