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What to Do if Your 401(k) Match Is Cut

If your employer has provided a match to your 401(k) contributions in the past, the trend might not continue. As the coronavirus pandemic continues to impact the U.S. economy, some companies are dropping the 401(k) match to reduce expenses. While the shift may enable employers to cut certain costs and avoid having to lay off workers, it can also be disheartening to see some of your expected retirement savings disappear.

Here's what to do if your 401(k) match is eliminated:

-- Understand the context.

-- Take care of your immediate needs first.

-- Contribute more if you can.

-- Think about an IRA.

-- Maintain a long-term focus.

Even if your employer reduces its contribution to your 401(k), there are some steps you can take to stay financially stable and plan for retirement. Follow these guidelines when mapping out a retirement savings plan after losing all or some of your employer's 401(k) match.

Understand the Context

A frenzied outlook can lead to hasty financial decisions. "Don't panic," says Chris Hogan, author of "Everyday Millionaires: How Ordinary People Built Extraordinary Wealth -- and How You Can Too" in Nashville, Tennessee. "This is the first place companies go to when they're trying to trim back." This could mean the chance of losing your job is much less, as your employer could be making the move to avoid having to reduce staff numbers.

In addition, looking at how companies have handled 401(k) plans in the past could ease anxiety. "This has happened before during the last financial crisis and it didn't last forever," Hogan says. "As the economy stabilizes, many companies will bring the match back."

[Read: How to Maximize Your 401(k) Match.]

Take Care of Your Immediate Needs First

Economic uncertainty presents an opportunity to review your current budget. "Your essential and immediate needs come first," Hogan says. That means you'll want to make sure you can pay for your home, utilities, food and transportation.

In households that have seen a dip in monthly earnings, it may be necessary to make spending changes. "If your hours or income have been cut, consider reducing your 401(k) contributions," Hogan says. Those funds could be used toward a mortgage payment, to pay for groceries or to cover other basic living expenses.

After looking at your budget, you may realize you can continue to save for retirement. "If at all possible, don't suspend your own contributions," says Andy Mardock, founder and president of ViviFi Planning in Bend, Oregon. "This will only leave you playing even more catch-up down the line."

Contribute More if You Can

If you have enough room in your budget, you might be able to put more aside for retirement. "If you're able, replace the employer match by increasing your own contributions," Mardock says. This move could lead to higher returns later. You'll be able to continue buying stocks at the same pace while the price is down. "Investing during down markets is one way that savers make lemonade out of lemons," Mardock says. If you purchase stock for a low price now and it increases in value later, you'll be able to reap the rewards.

Putting more in your 401(k) could also mean you'll save on taxes. "If you increase your contribution, your paycheck will be smaller," says Steve Sexton, founder and president of Sexton Advisory Group, a financial services firm in San Diego, California. You won't be taxed for the 401(k) contributions until they are withdrawn from the account. Instead, since the money you put into a 401(k) reduces your taxable income, your overall income tax bill for the year will be less.

[See: How Much Should You Contribute to a 401(k)?]

Think About an IRA

This could be a good time to look at other investment options, such as an individual retirement account. When compared to 401(k) plans, "IRAs typically have more flexible investment options," Mardock says. If your current 401(k) plan offers very few ways to invest your funds, you might be inclined to set up an IRA.

IRAs differ from 401(k) plans in several ways. The contribution limit to a 401(k) is $19,500 for 2020. If you're 50 or older, you can contribute up to $26,000 to a 401(k). For an IRA, you can contribute up to $6,000 in 2020. Those who are 50 or older are able to put up to $7,000 in an IRA.

There are two main types of IRAs. A traditional IRA is similar to a 401(k) in that the amount you place into the account reduces your taxable income. You won't pay taxes on your contributions to a traditional retirement account now, but when you take out funds they will be subject to taxes. With a Roth IRA, you'll pay taxes on the contributions you make now, but when you take withdrawals later the money is tax free.

[Read: How to Tell if You Have a Lousy 401(k) Plan.]

Maintain a Long-Term Focus

Even if your budget is tight, it can be helpful to avoid withdrawing from your 401(k) now. "Those retirement dollars are just as important as ever during difficult economic environments and markets," Mardock says. If you make an early withdrawal, you'll typically face penalties and tax consequences on the amount taken out.

Furthermore, by continuing to save for retirement, you could see benefits in several years or decades. "Retirement is a long-term asset accumulation event," Sexton says. "Every dollar you contribute to your 401(k) or IRA now enables you to acquire your stocks, mutual funds, real estate and more at a discount." Once the market comes up and your return increases, you'll have a nest egg ready when you retire.

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