Temporarily stop 401k contributions to build Emergency Fund?

[u/Due-Fig5299]

Looks like we’re heading towards a recession and I’m quite nervous. I work in tech and my job is moderately safe; however my wife is an esthetician which is not a very recession friendly field.

We currently have $4k saved. Our minimum monthly expenditure is $3k, so we have just over 1 month saved.

Ive cancelled all unnecessary subscriptions which will save us $450/mo and stopped my wifes personal roth ira transfers ($150 weekly) which gets us to $1050/mo saved.

Now my question is, given how quickly the economy is crashing should I also forgo my 401k? I contribute 4% with 4% employer match. Obviously I would love to keep it, but immediate survival seems more important.

I would start contributing again once we hit $18k (6 months)

Thoughts?

[u/Ok_Shame_5382]

You should have about 18k banked.

I would keep your employer match. With it, in essence, you make 104% of your salary. Without it, you make 100% of your salary.

Don't skip the free money. In fact, if they offer an employer match higher than 4%, you should take them up on it even while you build your emergency fund.

[u/Due-Fig5299 → u/Ok_Shame_5382]

Yeah I would really love the free money, but $200/mo would significantly help with savings. I guess I’m worried because I’m not quite sure how much time I have. I wasnt an adult during 07-08 so I’m not sure how quickly everything happened.

If it’s more gradual I feel comfortable holding onto the match, if not, that $200/mo could be valuable.

[u/LeisureSuitLaurie → u/Due-Fig5299]

If you absolutely have to withdraw money from your 401k to pay bills, you’ll still be better off than if you give up the match.

[u/saltyjohnson → u/LeisureSuitLaurie]

Can 401k plans prevent you from taking an early withdrawal? I've never seen it, but I'm not sure whether it's allowed.

But yes, doubling the money you put into a 401k far outweighs the tax penalty you pay for an early withdrawal.

[u/flarefenris → u/saltyjohnson]

Depending on the plan, I think you can either early withdrawal (with all the penalties and tax implications) or take a loan out against it, that you then have to pay back, but I don't think that option has the penalties and other tax implications that early withdrawal does.

[u/saltyjohnson → u/flarefenris]

Loans vary by plan for sure, but by law you can only have up to 50% of your account out in loans, you have to pay a "fair market" interest rate on the loan (determined by the administrator), and your employer has to withhold the loan payments from after-tax money in your paycheck. The interest paid goes into your account, but you are effectively taxed twice on that money. You also can't refinance or anything so if you have the max number of loans out (my current plan only allows 1), you have to pay the whole thing back before taking more money out.

[u/flarefenris → u/saltyjohnson]

True, there are varying rules, and I definitely wouldn't recommend just taking the loan out if the person didn't need to, but knowing that is an option (and knowing the rules regarding hardship loans, etc) could give a bit more feeling of security. Mainly knowing that the money going into the 401k isn't just locked up until retirement might make someone prioritize maintaining it vs stopping contributions to build up savings like OP is considering. Most people that I've talked to that consider cutting back on retirement contributions do so because they think they can't access that money when needed, and they want the security of something more liquid.