Should you lower 401(k) contributions to pay off debt?

If you're contemplating lowering your 401(k) contribution to pay off your debt, there are certain items to be aware of. (iStock)

Saving money for retirement is crucial. If you’re burdened with hefty credit card balances, school loans or other debt, however, you may be tempted to cut back on your 401(k) contributions to pay off the debt first.

Lowering your retirement savings to shed your debt may, indeed, make sense in certain circumstances. Whether it’s the best move for you depends on a number of variables, including your age, the interest rate on your debt, the type of debt, and whether your employer matches part of your 401(k) contributions.

More than 77 percent of U.S. families carried some sort of debt as of 2016, the most recent year that the government published data from its Survey of Consumer Finances. New data is expected later this year.


Nearly 42 percent held mortgages or other debt secured by their primary home, 38 percent carried credit card balances, while roughly 31 percent had automobile loans and 20 percent held education loans, which represented the largest source of households’ non-mortgage debt in dollar terms.

Clearly, it’s important to tackle that debt, especially high-interest balances. On the other hand, securing a financially healthy retirement is also critical and that requires saving or investing.

 A 401(k) is an employer-sponsored retirement plan that offers important advantages beyond the ability to automatically save through payroll deductions. You can lower your current taxable income (and tax bill) by participating because the company deducts your contributions on a pretax basis.

In addition, many employers match a part of employees’ 401(k) contributions – often amounting to roughly 3 percent of salary or wages, although the levels vary by company. That match constitutes a piece of the employees’ compensation, and they’ll forgo it if they don’t contribute enough.


Different experts offer varying rules of thumb on debt and retirement. When balancing the competing needs to pay down debt and save for retirement, consider the following factors.

Debt Type

If you’re approaching retirement and carrying large student loan bills, channeling some income toward debt payments may be wise, especially if your investment gains are unlikely to outpace the interest rate.

As mutual fund giant Vanguard noted, student loan debt typically must be repaid even in bankruptcy, and the government can garnish up to 15 percent of Social Security payments if you default on a federal student loan. That could spell big trouble for a retiree, or for a younger person receiving Social Security disability benefits.

On the other hand, if you enjoy a low-interest mortgage, feeding your 401(k) may serve you better than making extra payments on your home loan.

Interest Rate

A high-interest credit card balance can make it difficult to get ahead financially. Temporarily lowering 401(k) savings to get rid of this burden can work in your favor and bring some peace of mind as well.

After all, your retirement account would have to produce remarkable returns year in and year out to outpace a credit card with a 19 percent interest rate.

Paying off debt also might raise your credit score, which can provide more financial flexibility overall.

Debt Amount

If your debt level is fairly low, there may be no pressing need to divert cash from 401(k) investments to make extra payments. You should be able to eliminate this debt relatively quickly while you save for retirement.

Your Personality

While letting emotions fuel financial decisions can cause problems, your personal priorities and comfort zones may come into play in deciding whether to delay retirement savings to pay down debt.

If looming debt keeps you awake at night, taking care of that part of your financial life first may give you the peace of mind and mental energy to make other healthy financial moves, including retirement savings, once you’ve freed yourself from the burden.

A big 401(k) balance may look and feel great, but the number can provide a false sense of security if high-interest rates are bleeding you financially, or if you’ll be paying off debts into retirement.

Remember that any debts you take into retirement will become part of your retirement expenses and limit your ability to spend funds elsewhere.

Consider consulting a knowledgeable financial planner to help you assess the best moves and weigh savings against debt repayment as you work to secure your financial future.