Money Fix: When not to contribute to a 401(k)

Usually contributing to a 401(k) is good planning,

Usually contributing to a 401(k) is good planning, but there are times, experts say, when it is time to hold back. (Credit: iStock)

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While it may seem like financial heresy, there are some times when you shouldn't contribute to a 401(k).

The fees are too darn high! Fees are the silent killer. When they're around 2 percent, they eat away at your returns. Check out your plan's administrative, investment and management fees and if they're too high, just say no, says Glen Craig, publisher of FreeFromBroke.com.

Consider alternatives. If your employer doesn't match contributions, and doesn't have a lot of investment choices, look at a Roth IRA or IRA. "They provide similar tax advantages and a wider range of affordable investment opportunities," says Aron Gottesman, a professor of finance at Pace University.

Do the math. Reconsider contributing if you can't afford to reduce your take-home pay by the contribution amount after adjusting for the tax benefit, says David Altschuler, a certified financial planner in Woodbury.

And if you don't have 3 months' to 6 months' worth of emergency savings, re-evaluate the amount you're contributing to your 401(k) or stop contributing until you have your emergency stash. You don't want to have to tap your 401(k) if a problem arises; withdrawals can be costly due to tax penalties.

You're drowning in debt. If you're avoiding calls from creditors, consider paying down that debt before making contributions to a 401(k) plan, says New York Institute of Technology finance professor Steven Shapiro.

Your tax bracket changes. If your tax bracket changes, a 401(k) may not be your best option. Talk to your accountant.

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