5 Times It's Okay to Delay Retirement Savings
About one in five Americans isn't confident about having enough money for a comfortable retirement. If you're among them (or even if you aren't), putting off retirement savings seems like terrible advice. But if you're handling an ever-growing debt monster or an imminent threat of past contributions becoming taxable income — it may be okay to temporarily put a hold on retirement savings.
Here are some of the very few instances you should ever consider temporarily delaying saving for retirement.
1. Paying Back a Loan From Your 401K
According to a study from The Wharton School of the University of Pennsylvania, 20% of Americans take out a loan from their 401K plans. Even worse, there is evidence that treating your nest egg like a credit card can quickly become a bad habit: 25% of 401K borrowers take out a third or fourth loan and 20% of them take out five or more loans!
While the full loan balance is generally due within five years, it becomes due within 60 days when terminating employment or failing to meet the established repayment schedule. Any outstanding balances become taxable income, triggering not only applicable income taxes but also additional tax penalties.
Letting a 401K loan become taxable income will leave you with an unexpected, large tax bill next year and make you miss out on all the interest gains until retirement age. If you need to put retirement savings temporarily on hold to pay a 401K loan back ASAP, it's an understandable choice.
2. Dealing With Major Medical Expenses
If you're facing a major medical expense, you'll probably need all the help you can get. If your medical and dental expenses for the year are more than 10% of your adjusted gross income (7.5% if you or your spouse are over 65 or turned age 65 in 2016), you may qualify for hardship withdrawals from your retirement accounts. But a better option might just be to adjust the withholding on your paycheck using the IRS Withholding Calculator. This might allow you to pay for the expenses out of pocket by giving your budget more breathing room for the rest of the year. Sure, your retirement savings rate might temporarily slow, but at least you won't actively dip into them, either.
3. Eliminating High-Interest Credit Card Debt
In 2015, 21% of Americans believed that they would be in debt forever, up from 9% in 2013 and 18% in 2014. And high interest debt — such as credit card balances — are a big culprit.
Instead of mortgaging your future to high-interest debt, pay it off quickly, and commit to putting the savings on interest payments toward retirement contributions. You'll probably even end up saving more toward retirement in the long run than if you kept making minimum credit card payments and wasting money on interest and fees. (See also: When to Use a Balance Transfer Offer)
4. Building an Emergency Fund
Thinking that your 401K is already your emergency fund is one of the emergency fund myths you should stop believing. Taking a loan from your 401K is very often a bad idea because of the reasons explained earlier. Instead, take a couple of months to build an emergency fund that meets your unique financial situation. (See also: Figuring the Size of Your Emergency Fund)
5. Being Stuck in a Bad Forced-Transfer IRA
If a recent job change resulted in your previous 401K being forcefully transferred to an IRA, you might temporarily reconsider your retirement savings.
If your forced-transfer IRA charges outrageous fees, you're better off holding off on your contributions until you qualify for your new employer's qualified plan. In the meantime, you could put the money that you would contribute to the IRA in an investment or saving account with a better return or pay down high-interest credit card debt.
Once you set up your 401K with your new employer, roll over the entire balance from the forced-transfer IRA to the new account to improve the performance of your nest egg.
What are other times it's okay to put off retirement?
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