When you're considering how to allocate your paycheck, you have a few options. If your employer offers a 401(k) plan, one of those options is to maximize your 401(k) contribution. However, every dollar that goes into your 401(k) is a dollar you don't get as take-home pay. Is it better to receive more pay or up your 401(k)? The answer depends on a few factors.
The first and most important factor when it comes to determining whether you should increase your 401(k) contribution or receive more pay has to do with whether your employer offers a 401(k) match. Many employers match your 401(k) deduction at a specific percentage: an employer that offers a 100 percent match, for example, contributes one dollar to your 401(k) for every dollar you contribute. An employer that offers a 50 percent match contributes 50 cents to every dollar.
If your employer offers a 401(k) match, it is to your advantage to contribute to your 401(k) to get the maximum allowable employer match. Most employers cap the 401(k) match at a certain dollar amount. By contributing to your 401(k) to the point where you receive the maximum employer match, you might add significantly to your retirement savings. Retirement planning is an important part of life, and contributing to your 401(k) and receiving the company match is a secure way of preparing for your future.
However, sometimes it is better to receive more pay. If you are paying down significant debt, for example, electing to receive more pay helps you reduce that debt burden more quickly. Finance guru Dave Ramsey goes so far as to advise people not to start saving for retirement until they have paid off their debt.
On the other hand, if you have a 401(k) option with an employer match, making the choice to receive more pay but still contributing at least some money to your 401(k) every month helps you pay down debt or build your emergency fund while simultaneously funding a retirement vehicle. Deciding whether to receive more pay or contribute to your 401(k) is not necessarily an either/or situation. It is possible to contribute some money to your 401(k) while keeping the majority of your paycheck as take-home pay.
Many employers also allow you to increase your 401(k) contribution at any time, until you hit the maximum contribution level. You can also decrease your 401(k) contribution if you want to receive more pay. Talk to your HR department to learn how often you are entitled to change your 401(k) contribution rates, and feel free to adjust your 401(k) contribution levels as necessary.
Determining whether it is better to receive more pay or up your 401(k) is a personal decision. Consider all of the factors, including your current debt burden and the possibility of receiving extra 401(k) funding through an employer match. Remember that it is possible to continue to adjust your 401(k) contributions as your financial circumstances change.
Photo courtesy of Stuart Miles at FreeDigitalPhotos.net