Should you contribute to your 401(k) without an employer match?

In a perfect world, all employers would match every dime you sock away into your company’s 401(k) plan. The reality, on the other hand, is a bit different. While the average 401(k) match is 4%, there are some employers that don’t match with a retirement contribution at all towards their employee retirement plans. This begs the question: is it still worth it to invest in your company’s 401(k) if there’s no match?

Let’s walk through the decision process behind contributing to your employer-sponsored retirement plan even if you won’t benefit from matching contributions.

A quick look at the decision-making process

Undoubtedly the biggest benefit of the employer match is that it’s an immediate and guaranteed 100% return on any money you contribute to your 401(k).

If you make $100,000, and contribute 5% of your salary to your company’s 401(k), you’ll contribute $5,000 in one year towards your retirement savings goals. If your employer were to contribute up to 5% of your retirement contribution, you’d see an additional $5,000 hit your account – for a total of $10,000. The amount isn’t necessarily life-altering for some people, but it definitely can have a meaningful benefit if applied consistently over time.

The impact of a company match

In real life, the difference between $5,000 and $10,000 makes a big difference over time:

Employer matches matter, but it’s not the only consideration

Even if you tweak the numbers a bit in either direction, the result is clear: an employer-matching contribution benefit matters, and it matters a lot – particularly if you receive annual pay raises. This is especially true if an employer offers a dollar-for-dollar match for retirement accounts.

With that said, an employer contribution is certainly a major perk, but it’s not the only benefit of investing in your company’s 401(k) plan to benefit your retirement fund.

Benefits to contributing to a 401(k) without a match

1. Tax-deferred growth.

Given the nature of tax laws, there is only so much tax-protected space afforded to everyday investors. 401(k) plans represent a huge amount of that space – in fact, the limit on 401(k) contributions is between 3 and 4 times that of the commonly-used IRAs.

Tax implications

“Tax-deferred” is another way of saying that you won’t be responsible for any tax – not on growth, and not on earnings – until you withdraw money from the account. Most people should very much consider taking advantage of tax-advantaged savings where and when they can through a traditional 401(k).

401(k)s, in 2022, offer a limit of $20,500 ($27,000 if over 50) for employee contributions; IRAs only offer a limit of $6,000 ($7,000 if over 50). Note that a Roth account will consist of “after-tax” contributions – but you’ll benefit from not having to pay taxes when you start taking distributions.

2. Current-year tax deduction.

When you contribute to your 401(k) (assuming it’s a pre-tax 401(k)), you receive a tax deduction in the current year. For instance, if you make $100,000, and you contribute $10,000 to your employer plan towards your retirement savings goals, you’ll have an Adjusted Gross Income (“AGI”) of $90,000 for the year. Assuming a blended tax rate of 20%, you’d save $2,000 on your tax bill just by virtue of contributing to your 401(k).

The more you contribute, the bigger the benefit; in fact, the IRS recently raised the maximum employee contribution for 2022 to $20,500 – a meaningful number that can drastically reduce current taxes due.

3. 401(k)s are protected accounts.

If you’re ever in trouble with creditors, your 401(k) is not going to be accessible to them. Because these plans are protected under ERISA (“Employee Retirement Income Safety Act of 1974) laws, they receive special immunity even in the event of bankruptcy.

Bankruptcy implications

If for any reason you should ever need to declare bankruptcy, your 401(k) is inaccessible – for this reason alone, using a 401(k) can make a lot of sense from an insurance standpoint. IRAs, 403(b)s without employer matching, and regular taxable brokerage accounts do not receive the same level of protection.

4. You never actually receive the contributions in the first place.

While this on its face sounds like a negative attribute, it’s a good idea to “pay yourself first” and invest for your retirement without ever realizing it’s happening. This is because 401(k) contributions happen automatically – there isn’t that extra layer of decision-making needed to proactively put money towards your retirement savings goals. In other words, when you receive your paycheck, the 401(k) part is already done, and you can spend or save the remainder at your discretion.

5. IRAs have relatively low contribution limits.

As mentioned earlier, in 2022, you’re eligible to contribute $6,000 to an IRA, with an additional $1,000 catch-up contribution (for a total of $7,000) available to those over 50. 401(k)s offer a lot more room to invest in a tax-advantaged way, with the maximum employee deferral rising to $20,500 in 2022. Note that these amounts refer to direct contributions, and not to rollovers.

The exact decision tree depends on your personal circumstances, so you may wish to mix and match IRA and 401(k) contributions, specifically utilizing a Roth IRA and pre-tax 401(k).

Potential downsides of contributing to a 401(k) without a match:

The above points should be considered, but your personal circumstances might cause you to think twice about overloading your 401(k) – especially in the face of other priorities. Below you’ll find a few reasons that you should limit your 401(k) contributions, particularly if the plan doesn’t offer any sort of matching program.

Among the reasons to pause your 401(k) deposits:

1. Your plan has unusually high fees and/or inefficient investment options.

Not all 401(k) plans are created equal, and just because you have one doesn’t mean you need to utilize it for your retirement savings goals. Some antiquated plans come laden with high fees and/or a poor investment menu; in these cases, it may make sense to pass.

2. You haven’t funded a Roth IRA.

Assuming you aren’t getting a match at work, your Roth IRA is a great first stop for retirement savings – at least up to the IRS-prescribed limit of $6,000 ($7,000 if you’re over 50). If your 401(k) plan isn’t offering anything in the way of matching, your Roth IRA is a great first step instead.

3. You have no emergency fund.

Liquid cash reserves are critical to building a financial foundation. If there is no employer match, and you don’t have any emergency fund, you might want to consider building cash until you’ve reached a point at which you can begin to invest toward your retirement savings goals.

4. You have other goals.

One of the downsides to 401(k) investing – particularly without a match – is that you won’t have ready access to any money you contribute. That is, you won’t have access to the money without the looming threat of taxes, penalties, and interest charges. If your goal is to save for a home, it’s better to prioritize a solid cash base on your own before devoting too much to your employer plan.