Working Senior Wonders About 401(k) Match

Dear Dr. Don,

I'm 64 and just renewed a two-year contract with my employer. I participate in my employer's 401(k) plan, which matches up to 7%. I also have an individual retirement account. My question is: Should I contribute the maximum to my 401(k) while withdrawing from my IRA to supplement my living expenses or leave the IRA alone and only contribute what I can to the 401(k)? I just don't want to miss out on any matching contributions.

Thanks,

- Sam Saver

Dear Sam,

You should try to take full advantage of all the financial benefits offered by your employer. It is best, generally, to avoid leaving money on the proverbial table. You should keep contributing at least up to the limit of your employer's match on your 401(k) contributions.

It sounds like you won't be able to afford the lifestyle you want if you maximize your 401(k) contributions.

You're making tax-deferred contributions to the 401(k). But your IRA distributions, or payments, assuming the contributions were also made on a tax-deferred basis, create taxable income.

A $10,000 unmatched tax-deferred contribution to your 401(k) plan reduces your federally taxable income as well as your income tax bill. You pay payroll taxes on your 401(k) contributions; it's just the income tax that's deferred. A $10,000 withdrawal from your IRA is taxable income. Leaving state income taxes aside, assuming you're in the 25% tax bracket, you'll pay $2,500 in federal income tax on the distribution. That's equal to the amount of income tax deferred on the 401(k) contribution.

Keep contributing!

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "Financing a home," "Saving and Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.