Does it ever make sense to not invest in a 401K?

[FrugalFish]

Is there ever a good reason to not invest in a 401K?

My DH is currently with a company that he may not stay with for very long- i.e. he would not have any vested interest in the match. He's not interested in moving previous 401Ks to this company, so his balance would be quite small when he leaves- and would therefore automatically cash out and be subject to taxes and penalties (we've been through that before).

I understand the lure of pre-tax investing, and that he could be proactive and do a rollover into an IRA upon leaving, but is it really worth the trouble for 6 months - 1 year? Or would it make more sense to save and invest in our established post-tax investments for the time being?

WWYD?

[safari]

Is there ever a good reason to not invest in a 401K?

My DH is currently with a company that he may not stay with for very long- i.e. he would not have any vested interest in the match. He's not interested in moving previous 401Ks to this company, so his balance would be quite small when he leaves- and would therefore automatically cash out and be subject to taxes and penalties (we've been through that before).

I understand the lure of pre-tax investing, and that he could be proactive and do a rollover into an IRA upon leaving, but is it really worth the trouble for 6 months - 1 year? Or would it make more sense to save and invest in our established post-tax investments for the time being?

WWYD?

If he is not going to get the company match, you might as well contribute to your personal IRA or Roth IRA. If you're going to max it out, then it would make sense to contribute to his 401(k). Depending on his salary and the percentage that he can contribute, the balance may not be as small as you think. For example, if he is making $50K and contributes 10% of his paycheck to 401(k), in 6 months - 1year his balance is going to be $2,500 - 5,000. Effectively, if he maxes out his IRA contribution and then rolls over his 401(k) balance into his IRA account, he will have contributed twice as much as the yearly IRA limit. So I think it would be worth the hassle.

[Broken Arrow]

I think there are indeed times when it would make sense to not invest in the 401k. For example, if someone does not have any emergency fund whatsoever, then I would do that first.

I don't think it makes sense to roll from one 401k to another either. I think it's a good idea to take advantage of any 401k match whenever they are available, and then roll them into at least a traditional IRA at a separate brokerage. Just keep rolling them into that same separate IRA from each job. That's what I would do anyway.

[Fern]

all good points. the only thing i would add is that time has a way of changing people's perspectives, and what your husband thinks today, that he'll 'probably' not stay for long, well, he could end up being there for years, and thehn you might regret the lost opportunity.

[jIM_Ohio]

Is there ever a good reason to not invest in a 401K?

My DH is currently with a company that he may not stay with for very long- i.e. he would not have any vested interest in the match. He's not interested in moving previous 401Ks to this company, so his balance would be quite small when he leaves- and would therefore automatically cash out and be subject to taxes and penalties (we've been through that before).

I understand the lure of pre-tax investing, and that he could be proactive and do a rollover into an IRA upon leaving, but is it really worth the trouble for 6 months - 1 year? Or would it make more sense to save and invest in our established post-tax investments for the time being?

WWYD?

It depends on rollover accounts, other retirement investments and your current tax situation.

[disneysteve]

his balance would be quite small when he leaves- and would therefore automatically cash out and be subject to taxes and penalties

There is absolutely no reason to cash out and pay taxes and penalties no matter what the amount. What he should do is roll it over into an IRA.

[FrugalFish]

Thanks for the feedback.

Steve, a few years back DH had a 401K that had been over $5K, but through some serious downturns, it dropped just below the $5K mark and without warning a check was cut for $49xx minus taxes and a penalty. I don't know what they did with the check after they cut it, but it appeared at our house only 2 weeks before the deadline for penalty-free rollover (I understand now that a letter announcing the closure of the account was suppose to arrive well in advance of the check being cut, but that letter showed up a month after the rollover deadline...). Anyway, it was a mad dash to get that check cashed, find the cash to make up the taxes and penalty, and get it deposited into another pretax account before time was up. We had just bought our first house at the time, so cash and time were short. Things sometimes happen, that's why I said he'd have to be more proactive if that turns out to be the case.

The good news is that I was reading this company's policy and anything under $1K they will give you the opportunity to rollover before cashing it out (hopefully this company really will). Anything from $1K-$5K they will automatically convert to an IRA for you. Not a bad deal, so we're looking forward to getting the new 401K going. We decided we like the habit of doing the 401K and don't want to get out of it.

Thanks again.