In short, the answer is yes - absolutely. Here are the reasons why. Let’s assume you took a substantial hit to your 401K plan when the stock market plummeted approximately 5000 points.
The amount of stocks, bonds, mutual funds, and other holdings that your401K provider continues to purchase at a very low price will eventually increase in price once the stock market rebounds. If you do not contribute, you will be losing out on the potential increase your overall portfolio will obtain.
The economic rule of thumb is to buy low and sell high. Now is therefore the best time to make substantial contributions to your 401K, especially if you are a young individual who has just entered the business world or if you are five to ten years from retirement. It’s a good idea to check with your 401K plan provider or employer to determine what the maximum contribution is and, if at all possible, whether you can meet that amount annually.
If you cannot afford to maximize your contributions, you can determine what percentage you can afford per paycheck so that at least you are contributing something to the plan. For example, let’s assume you can only contribute 5%. Take time to set a household budget and then determine how much you can afford to contribute to your 401K. Perhaps you can start with 5% and increase it by 1% each year, until you reach the maximum allowed.
A 401K is non-taxable except in an extreme case wherein you are financially strapped and need to withdraw all the money. In this case, you will be taxed for early distribution. There are other options available to you. If you need money for your child’s college tuition or to pay the mortgage, you can apply for a hardship distribution.
You can also apply for a loan of up to 50% of the total amount accumulated. However, it would have to be paid back in five years and if you default three consecutive months in a row, it will be considered a distribution and is therefore taxable.
While most economists estimate that the current economic crisis will last approximately 18 months or longer, it is advised that you seriously consider whether or not you want to utilize this money. Remember, the 401K provider will continue to increase the amount of equity in your plan now, and at a time when stocks are at their lowest, you can lose out in the long term if you stop contributing.
Having a 401K plan is an important of your financial future. Whether you stop contributing or not is up to you, but it is recommended that you contribute something every paycheck so that when the economy turns around, you will at least have some funds available to you in case of an emergency.