Paying off debt while also saving for retirement can be a tricky balancing act. On one hand getting rid of high-interest debt like credit cards should be a priority to stop extra fees and interest charges from piling up. On the other hand, consistently contributing to your 401k is crucial to grow your nest egg and ensure you have enough income in retirement. So what should you do if you’re struggling to make both payments each month? Is it ever a good idea to temporarily stop or reduce 401k contributions to put more money toward eliminating debt? Here’s what you need to know.
The Downsides of Reducing 401k Contributions
First let’s go over why stopping 401k payments altogether should generally be avoided if possible. Here are some of the potential downsides
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Missing out on employer matching contributions: Many employers offer to match a percentage of employee contributions up to a certain limit. If you stop contributing, you miss out on this free extra money going into your account.
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Less money compounding tax-deferred: Reducing the amount going into your 401k means you have less money earning returns and compounding year after year in a tax-advantaged account.
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Potential taxes and penalties: If you make a withdrawal from your 401k before age 59 1/2, you’ll pay a 10% early withdrawal penalty on top of owing income taxes on the amount withdrawn.
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Harder to rebuild habit: It can be challenging to get back into the habit of consistent contributions after taking a break. Life circumstances could continue getting in the way.
As you can see, pressing pause on retirement savings isn’t ideal. You stand to lose out on a lot of money in matching funds, growth, and penalties. However, in certain situations, it may make sense temporarily.
When Reducing Contributions Could Help
Here are some scenarios where you may want to consider temporarily dialing back the 401k to make more progress on debt:
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You have high-interest debt: Credit card debt, payday loans, and other high-interest debt should be prioritized for payoff before retirement savings since their rates can exceed 20%. The money you save on interest by paying them off faster may outweigh retirement account growth.
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Your job is unstable: If you anticipate possible layoffs or reduced hours, having less cash flow tied up in your 401k could give you more flexibility. You may need the money for day-to-day expenses.
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You’re having trouble making minimum payments: If you’re struggling each month to make even the minimum payments on debts, it may provide some relief to reduce 401k contributions temporarily so you can pay bills.
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You’ve used up your emergency fund: If you’ve depleted your emergency savings, diverting some money from retirement savings could help you start replenishing it or pay unexpected expenses.
Even in these situations, you’ll want to crunch the numbers to see if the pros outweigh the cons. Use a 401k calculator to estimate the growth you’d potentially miss out on. And talk to your 401k administrator – you may be able to take a loan rather than withdrawing entirely.
Strategies to Reduce Impact
If you do decide to cut back on retirement account funding temporarily, here are some strategies to reduce the impact:
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Don’t stop entirely – Reduce contributions to the minimum needed to get the full employer match if possible. That way you get some free money.
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Set a timeline – Commit to a set end date, like 6-12 months, to start increasing contributions again. Don’t let the break become indefinite.
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Automate the increase – Schedule automatic contribution bumps in 6-12 months so you don’t have to remember to increase it later.
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Shift budget priorities – Look for other expenses you may be able to cut temporarily to put even more toward debt payoff.
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Recalculate benefits – If you take a loan or withdrawal, work with your 401k provider to recalculate your investment returns and balance at retirement. See how it impacts your projected monthly income.
The bottom line is that stopping 401k contributions completely should really be a last resort. If you must temporarily reduce them to pay off pressing high-interest debts, take steps to minimize the interruption and get back on track as soon as possible. With some strategic planning, you can eliminate debt faster while still keeping retirement savings on track.
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When should you lower your retirement contributions
“Given how shaky things are economically, I think putting some focus on paying off credit cards is prudent,” says Renfro.
This is particularly true if you have a credit card balance you were planning on paying off, but now your job is less secure and youre concerned about a tighter budget.
To get by, you could consider making only the minimum payments for a few months, which might make sense if youre fairly confident your income will increase again in just a short time. But if it looks like youll be paying the minimums for a while, it could cost you more in the long term if youre paying high interest charges on your debt each month.
In this case, if you have the option to use the money that youre putting toward retirement to knocking out your debt, theres little immediate cost other than missing out on a few months retirement savings, and the saving on interest could make it worth your while.
However, Renfro cautions against making this choice without a plan.
“Youd not really be doing yourself much of a favor if you simply run the balance back up,” he says, adding that its also important to know when and how youre going to build your retirement back up after paying off your credit card.
Select spoke to a financial advisor about whether you should reduce your monthly retirement contributions to pay off debt during this economic recession, plus a tip for rebuilding when you’re debt-free.Updated Tue, Apr 29 2025
If your income has been hit by the coronavirus pandemic, now may be a good time to find ways to stretch your finances a little further.
This is especially true if you are balancing multiple debts, youre anticipating less money coming in and youre not sure how to prioritize your bills.
If you are regularly investing in a retirement account, whether thats a 401(k) or an IRA, one solution could be to lower your contribution amount and redirect that money toward paying off debt. While its not ideal, doing so temporarily can free up some much-needed cash to address immediate priorities that take precedence from time to time.
“Diverting some retirement savings to paying down credit card debt can make a lot of sense right now,” Brandon Renfro, a certified financial planner in Marshall, Texas, tells Select.
Below, Renfro explains when it makes sense to lower your retirement contributions to pay down existing debt and what to do in order to make sure its worth it in the long run.
Should I Really Stop My 401(k) Contribution While Paying Debt?
FAQ
Should I use a 401k to pay off debt?
Key Takeaways
There are some exemptions to the early withdrawal penalty. Lying to get a 401(k) hardship withdrawal can result in fines, tax penalties, job loss and even jail time. The total cost of borrowing from your retirement to pay off debt is not worth it.
How much should I contribute to my 401k while paying off debt?
However when you are in debt, you should only contribute up to the match. This means you must contribute to your retirement plan as much as it takes to MAXIMIZE your employer’s match. This is a very wise move. You need to make sure your future is considered, despite the fact that you are paying for your past.
Should I stop contributing to my 401k to pay off debt Dave Ramsey?
Absolutely not. Always max out your 401s. Especially if you have employer matching funds adding to it. Cut back in other areas to pay off the bills. It may be difficult and you may not like what you have to cut out but hopefully it’s short term. Investing in your retirement future is THE most important act you can do.
Should I still be putting money in my 401k?
Aim to save at least 15% of your pretax income each year for retirement (including employer contributions). This can be in a 401(k) or another retirement account. Contributing early can help you get the most out of your 401(K).