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I have been contributing 6% of pre-tax pay to my 401k for 2 years. My company matches 1/2% for every % withheld until 6%, so I was getting the maximum company match. Due to my current debt situation, I have stopped contributing. I'm 25 and I'm planning this shutoff to be around 6 mos. By then I should be in a better debt position. I brace myself for the flames.
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Due to my current debt situation, I have stopped contributing. I'm 25 and I'm planning this shutoff to be around 6 mos. By then I should be in a better debt position. I brace myself for the flames.

Why flames? The plain fact is, if you are so in debt that you can't afford to put away into savings, then you *can't*. However, ABSOLUTELY only use the money for the purposes for which you need it! (I assume you're going to add it to your snowball, or to replace money you need for living that you're using in your snowball.) Otherwise, it might be too hard to "tighten the belt" back down in 6 months... I, myself, went from 15% to 0% - and then back up to 2% with my last raise (the % that made my take-home the same as it was before the raise!)

Maureen
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kirbivore,

You wrote, I have been contributing 6% of pre-tax pay to my 401k for 2 years. My company matches 1/2% for every % withheld until 6%, so I was getting the maximum company match. Due to my current debt situation, I have stopped contributing. I'm 25 and I'm planning this shutoff to be around 6 mos. By then I should be in a better debt position. I brace myself for the flames.

Do this if you can find no other way to dig yourself out of your debt. It's probably not worth making unmatched contributions while you're trying to get out of debt; but in your case giving up the match is effectively the same as taking a voluntary 3% cut in pay.

If stopping your contributions for 6 months makes the difference between keeping your head about water and BK, then by all means do it. But if your just doing it to shave a month or two off your debt repayment plan, spend some time "running the numbers" and considering what it is your giving up in exchange for a quicker payoff.

- Joel
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Don't forget to factor in tax considerations as well.
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As others have said, you should only stop the 401(k) contributions if you would otherwise make zero or negative debt progress. Otherwise you are giving away free money. The match is tax-free to boot! Shaving a couple of months off your snowball could not possibly make up for not getting this free money.

SirWired
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SirWired,

I agree with your message, except for the bit where you say, The match is tax-free to boot!

That's a common misconception. The match is tax-deferred income, just like your own contributions. You will pay taxes on both when you withdraw the money in your retirement years. Even so, I wouldn't pass up a 3% raise if I could help it.

- Joel
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scratch, scratch, scratch

(soapbox being dragged out)

No flames, but I would not give up that free money. You should be saving now when the compounding interest on your investments works for you the most.

The example I wish I had followed is the 18 year old investing 2000 a year for 10 years, then stopping has more moeny than a 28 year old who invests 2000 a year until retirement.

6% is actually 9%, so you lose 9% plus interest times the number of years until you draw the money out.

See if you can work it with the 401K.

fredinseoul
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fredinseoul,

You wrote, 6% is actually 9%, so you lose 9% plus interest times the number of years until you draw the money out...

Actually, another more precise way to look at this in interest and/or penalties. The contribution is 50% of every dollar contributed. So the penalty is an up-front 33% fee for gaining immediate use of your money.

No matter how much of that 401(k) contribution you want to hold back, it will cost you 33% of each dollar. So, for each dollar not contributed, you will only get $0.67 back. That doesn't even consider the tax implications.

That's a hell of loss to take, if it's not absolutely necessary.

- Joel
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I'm 25 and I'm planning this shutoff to be around 6 mos. By then I should be in a better debt position. I brace myself for the flames.

How long would the debt repayment be if you don't do the "shutoff" to the 401(k)? Given that you indicate it will be six months if you do eliminate the contribution, I can't imagine it would be too much longer if you keep contributing.

Personally, I think it would be better in the long run to continue the contribution and the free money from the company while taking a few extra months to eliminate the debt.

DT
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Joel, You are right, the match isn't tax free just tax deferred but the money itself is free since all you have to do to get it is to save your own money in the 401K and I agree, I'm not passing up any free money.

herb
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