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Reader Question: Should You Ever Defer 401(k) Contributions?

Stephanie asks: I recently started a new job that will not match 401(k) contributions until I complete one year of service. Should I still contribute prior to being eligible for matching?

Bottom-line answer? Yes.

Employers often make new hires wait to get 401(k) matching funds, and many companies subject matching contributions to a five-year vesting schedule. When 401(k) matching contributions are subject to vesting, your employer puts money in your 401(k) account each pay period and it begins acquiring interest. But if you leave your job within fives years, you only receive a percentage of the matching contributions (usually 20% per year of employment), plus interest.

In either case, you should still contribute to your 401(k) from the first day you are eligible. Employer-matched funds are a nice perk, but a 401(k) plan’s real benefit is that you can invest pre-tax dollars and allow funds to accrue interest—tax-free—for your entire career.

According to a Hewitt and Associates study, only 31% of employed 18-to-25 year-olds contribute to a 401(k) compared to 63% of 26-to-41 year-olds and 72% of workers 42 and up. That’s too bad, because when you retire, $1 invested when you are 25 will be worth at least $5 invested when you are 45.

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What do you think? Would you not contribute to your 401(k) in this case?

Published or updated on June 26, 2008

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.


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  1. jake says:

    The correct answer is “no.” This vesting ridiculousness is rarely talked about and yet, is part of the 401k savings problem. Employees look at their vesting schedules and sometimes turn away from a 401k because of it. Companies need to eliminate it. I know I wouldn’t put a penny into any 401k that’s on a vesting schedule, even if I think I’ll be their five years.

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