Twenty Something Sense

“How do I lower my payroll without letting anyone go and not forcing pay reductions on my already stressed people? Easy, I’ll stop matching their 401(k) contributions.”

In an effort to find cash during this historic economic downturn, some employers are beginning to suspend their 401(k) match plans (here, here, and here). In essence this is a 3% pay cut for all employees (the average 401(k) match is 50% of employee contributions up to 6%). You might be upset to not see this match in your account during the coming year, but I’d be careful to not complain too much around your newly unemployed friends.

With so many 401(k) match suspensions and surely more to come; now is a good time for everyone to educate themselves on the order in which their money should be placed into their various savings/investment accounts. Here we go…

1. 401(k) *Only if you have Match
Contribute the minimum amount necessary to receive your employers full match. This is free money and you’d be a fool not to take FREE MONEY.

2. Employee Share Plans
Many companies offer employee shares at reduced prices to the current fair market value (FMV). These shares can be sold within days of buying them and similar to the 401(k) match, your company is giving you FREE MONEY.

3. Roth IRA (Traditional vs. Roth is tabled for a future blog)
While both an IRA and 401(k) share the advantage of differing taxes, an IRA is preferable to a 401(k) for many reasons. The two that are perhaps most important to you are 1) you can withdraw your total contributions without penalty at anytime and 2) you are not forced to invest in the (often horrible) limited investments your employer has chosen for your 401(k) plan. You can contribute up to $5,000 to a Roth IRA in 2009 and you should max this out before going back to your 401(k).

4. 401(k)
Once you’ve maxed out your Roth IRA for the year, you should focus on placing your money into your 401(k). In 2009 you can put up to $16,500 into your 401(k).

5. Taxable Personal Investment Account
You still have money left? Either you are very handsomely paid or you are having trouble following along. If you’ve had a good enough year to stash $5k into your IRA, $16,500 into your 401(k), and a percentage of your salary into company stock, then the only place left to dump your money is into taxable personal investment accounts.