Your 401k is a valuable tool to help move your retirement nest egg in the right direction. While it may not be the optimal account to contribute to given your circumstances, I do think that if you’re able to take advantage of an employer match (your workplace contributes a portion to your 401k when you do), contributing an amount to maximize your employer match is the best move.

Financial guru Dave Ramsey refers to such employer matches “free money.” He’s right but to a certain extent. Indeed, one should never turn down a chance to get some extra cash from their employer!  Of course, such 401k matches aren’t really “free” per se. It’s more of a benefit for your hard work and loyalty at a company. Either way, it’s in your best interest to get the most benefit while it’s available to you. 

In this piece, we’ll check in with the case of an individual from Reddit who’s wondering if they should prioritize 401k while their employer has a matching plan or if they should focus on investing in other areas of their portfolio. Personally, I think the 401k should be a top priority over other investment accounts if there’s a match to be had. Indeed, some employers offer some really generous matches (think more than 100%).

401k matches can really put your retirement plan on steroids!

That’s a lot of cash that could really help you “floor it” on retirement. Of course, you’ll need to save up enough cash in other areas (think a Roth IRA or non-registered account to prepare for nearer-term expenditures), but if you’re able, you should catch as many of the dollars your employer may throw your way. Indeed, it’s a nice feeling to get extra cash from your workplace without having to put in more hours! Also, the tax advantages are a cherry on top of the sundae, especially if you’re already in a high tax bracket and you don’t expect to climb the tax bracket ladder all too much higher in the coming years.

Unfortunately, not everyone’s employer has a 401k match. It’s definitely worth discussing with one’s supervisor, though, if a firm can’t afford to give you a raise on an annual bonus around the holidays. Indeed, there are tax advantages to matching contributions for the employer. For the folks who don’t have a matching plan in place for their 401ks, I’d argue other accounts may take precedence for your contributions.

At the end of the day, the 401k is meant for building your retirement nest egg. And it’s something you don’t want to withdraw from all too often to minimize the financial hit to the chin you’ll receive. In a prior piece, I praised the relative flexibility of other accounts, including the Roth IRA, for those who don’t have a 401k match in place. 

When does it make sense to prioritize other accounts?

Dave Ramsey thinks employee matches are “awesome,” and he’s right to pound the table on it. Still, he does note that debt repayment should come before contributing to a 401k. Indeed, if you’ve got high-interest debt on a credit card, that bill should be covered before you contribute, given how absurd the rates are for balances. As always, contact a financial advisor if you’re looking to balance debt repayment with 401k contributions to make the most of your match.

The bottom line

If your work offers a 401k match, you should prioritize contributing to that account, provided you’re not in debt. If it’s an extremely generous match (let’s say 100% match or more), there’s no question that the 401k should be a number-one priority for savers. However, if you’re getting a less generous match, you may wish to diversify across other accounts for liquidity’s sake (something I pointed out in a prior piece), but the 401k should still stand above the crowd. 

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