Lowering or pausing your Gusto 401(k) contributions is always an option, but it helps to weigh the trade-offs first. This article walks through the benefits of staying in your 401(k), how even small contributions add up over time, and ways to adjust your savings rate without stopping altogether.
If you do not wish to contribute money from your paycheck into your 401(k), or you are not in a financial position to do so, you can opt out and stop deferrals at any time.
Before you lower or stop your contributions, consider what your Gusto 401(k) offers that other savings or investment accounts do not.
Tax-deferred growth: With pre-tax deferrals (money taken from your paycheck before taxes), you do not pay taxes on your investment growth until you withdraw the money. With other accounts, you pay taxes on earnings in real time.
Roth 401(k) tax-free earnings: If you make Roth 401(k) contributions and meet certain requirements, you may get your earnings tax-free.
Lower taxable income: Pre-tax deferrals reduce your taxable income, which may lower the amount of income taxes you owe for the year you contribute.
Bankruptcy protection: The law protects your Gusto 401(k) assets if you declare bankruptcy or face judgment creditors.
Higher contribution limits: 401(k) accounts have higher contribution limits than Individual Retirement Accounts (IRAs).
Free money from your employer: Your employer may offer an employer match or profit-sharing contributions. These also grow tax-deferred until you take a distribution.
Even if you cannot afford to contribute up to the annual 401(k) contribution limit, contributing something is better than nothing. Starting small lets you take advantage of compounded interest and any employer match your company may offer.
Important: Even contributing just 1% of your income can amount to significant savings over time.
Say Peter works full-time and earns $30,000 per year. He’s 22 and plans to retire in 40 years at age 62. Assuming Peter never gets a raise and his income stays flat, he contributes just 1% of his annual salary—setting aside $25 per month into his Gusto 401(k).
With compound growth—where earnings reinvest to generate their own earnings—Peter will accumulate $60,264 by retirement (assuming a 7% annual return). Despite his flat salary, that final amount equals 5% of his total lifetime earnings, all from a modest 1% contribution.¹
Instead of opting out completely, you could lower your deferral rate temporarily. This way, you keep building your retirement savings while freeing up more of your paycheck.
As a reminder, you can change your contribution rate at any time.
If you need to pause or reduce your contributions right now, set a reminder to check in with yourself every few months. Your financial situation may change, and restarting or increasing contributions later still makes a difference.
In the meantime, learn more about the Saver’s Credit, which may provide additional tax incentives to help you save more now and for retirement.
Gusto Retirement makes no representations or guarantees with regard to investment performance, as investing involves risk and investments may lose value, including loss of principal. Clients should consult a qualified investment or tax professional to determine the appropriate strategy for them. ¹ Example is for illustrative purposes only and assumes a 7% average annual rate of return.