When Your Employer Stops Matching 401(k) Contributions

My employer is no longer matching any of my 401(k) contributions. Can I roll the savings in my 401(k) into an IRA?

Welcome to the club. Several major companies, including Sears, General Motors, Eastman Kodak and Motorola, have suspended their 401(k) match over the past few months. FedEx plans to stop matching 401(k) contributions on February 1. And Starbucks announced that it will no longer guarantee a 401(k) match to employees.

You can’t roll over your 401(k) into an IRA while you’re still employed at that company, so you’ll need to leave the money in that account. You may be better off sticking with your 401(k) anyway – an employer can discontinue its match but still offer good investment choices in its 401(k). And when business picks up, your company may reinstate its matching contribution.

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But in the meantime, less money will be going into your 401(k), so it’s a good idea to boost your retirement-plan contributions if you can to make up for some or all of the loss of your employer match.

Now is also a good time to reassess where to invest your future contributions. We usually recommend that you invest in your 401(k) at least up to the match before investing in an IRA. If your 401(k) has good investment choices and low fees, you can continue investing there first.

But if you don’t like your 401(k) investment choices, consider contributing to an IRA instead. You can contribute up to $5,000 to a Roth IRA ($6,000 if you’re 50 or older) if your income is $105,000 or less in 2009; or $166,000 or less if married filing jointly (you can make a partial contribution if you earn $120,000 or less; or $176,000 or less if married filing jointly). You won’t get an upfront tax break as you do with your 401(k), but all the money you withdraw from your Roth IRA in retirement will be tax-free.

If your earnings are higher than the income limits, you can make a nondeductible contribution to a traditional IRA and—if you like-- roll over the account to a Roth when the $100,000 income limit on conversions disappears next year.

See the Build a Nest Egg page of our Retirement channel for more information about saving for retirement.