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The way I'm looking at is: I'm still ahead because all of the money I put in is pre-taxed, so, it's still free money in my pocket later on. My co-workers who have stopped contributing think I'm crazy. Am I right in my thinking or should I stop contributing and roll my money over to somewhere else?

The 401(k) contributions are usually pre-tax which, if you are close to the income limits for a Roth IRA, would help by lowering your income as far as the limits are concerned. However, the tradeoff for pre-tax contributions to your 403(b) or deductible contributions to a Traditional IRA is that distributions (withdrawals) in retirement will be taxed at ordinary income tax rates. So this isn't free money later on.

If you think your retirement tax rate will be higher than your current working tax rate, it may make sense to maximize Roth IRA contributions, even if you might have to reduce your 401(k) contributions. With the Roth IRA, you pay taxes now, when your tax rate is lower, before that money goes into the Roth so you can have the distributions from the Roth be tax free in retirement.

On the other hand, if you expect your retirement income tax to be lower than your current working tax rate, you may want to make use of pre-tax investments first, such as your 401(k) or, if your income levels allow for it, deductible contributions to a Traditional IRA. The 401(k) usually allows for much larger contributions. The idea is to defer taxes until you expect that your income tax rate will be lower.

If you expect your retirement tax rate to be pretty much the same as your current working tax rate, it is a wash after tax considerations between the after-tax/tax-free accounts (Roth IRA) and the pre-tax/taxed-withdrawals accounts (401(k), Traditional IRA funded with tax deductible contributions), other factors being equal. Roth allows withdrawal of regular contributions at any time without tax and without penalty (but it is a different story with the earnings), but the 401(k) enjoys ERISA protection from creditors (except IRS and divorce).

Taxable accounts (after tax money is used for investing, the gains then get taxed at either capital gains rates or at ordinary income tax rates, depending on the nature of the growth) don't work out as favorably as the above "tax favored" accounts over the long run, other factors being the same, but then there are no income limits, no withdrawal age limits, lots of flexability, but at the tax penalty, and also with potential on-going tax obligations (e.g., dividends and realized capital gains are taxable in the year they occur).

Other factors are often not equal. As mentioned by another poster, if the investment choices inside the 401(k) are poor (e.g., high expenses or lags the average for what that particular choice invests in), it may be better to skip the 401(k)--if the expenses are high enough or the returns are significantly below similar types investments, the tax-favored advantage might end up not being an advantage after all.

There are some other things one might consider:

1. Whether a 401(k), Roth IRA, taxable investments, or a combination of all these, they are investments (or at least savings). Treat them as serious business--learn your options, develop an investment strategy that you can stick with, and stick with it! (Counter example: I was in an expensive 403(b) plan for a couple years before I started seriously considering expenses, and then when I realized I could switch 403(b) providers for lower expenses and higher returns, I had missed about $1500 in the higher expenses and surrender charges that I wouldn't have had if I had started with my current 403(b) provider.)

2. Payroll deduction is a great way to save or invest. If one doesn't have the discipline to save or ivnest on one's own, having Payroll provide the mechanics to keep the money out of your hands really does help! (I have managed to save, maybe, $2K over the past 23 years. But you wouldn't know that if you look at my accounts--my credit union, my 403(b) provider through our Payroll department, and my taxable investments do my savings for me, that is, they get a good chunk of my money before I get a chance to foolishly sqander that cash!)

3. I am trying to recall if it were 75% of retired Americans are living below the poverty line. Whatever the number is, the vast majority of Americans are financially unprepared for retirement. By saving and investing now, you are taking steps to have a decent retirement instead of eating cat food or dumpster diving dinners in your cardboard lean-to.

4. Don't lock too much into retirement! It is recommended that one pays off all consumer debt (non-house, non-student loans), build up a fully-funded emergency fund (typically the equivalent of 3 to 6 months of living expenses), and save or invest for pre-retirement goals without forsaking the retirement goals.
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