Can I Add Money to My 401(k) Whenever I Want?

A reader asks GoBankingRates‘ Ashley Eneriz if he can add money to his existing 401(k) even though he is no longer employed by the company that offered it or a new company.

The answer is relatively simple: No.

A 401(k) is an employer-sponsored plan and as such must be funded with payroll deferrals from that company. Ms. Eneriz then goes on to offer other ways to save for retirement when a 401(k) is unavailable, and that is where PlumTree feels it must step in and clarify some of these recommendations.

Ms. Eneriz offers two other ways to save for retirement while you’re unemployed:

  • IRAs: An Individual Retirement Account is separate from your retirement account with your employer. You can manage your IRA portfolio using every investment tool available, unlike a 401k account which limits you to a select portfolio through your employer. However, IRAs do have a contribution limit of $5,500 a year. There are two different types of IRAs: A traditional IRA, for which contributions are tax-deductible, but withdrawals are taxed, and a Roth IRA, for which contributions are taxed, but growth and withdrawals are tax-free.
  • Bonds: Bonds are regarded as a safe investment because they’re considered to be like a stable savings account. Bonds earn interest at the rate offered at the time of purchase.

There is simply not enough information here, or, just enough to get someone in trouble:

IRAs: IRAs are excellent savings vehicles for retirement, offering tax breaks for many, but, there are limits to one’s contributions, starting with: While the annual contributions rate for savers under the age of 50 is $5,500 per year, the annual contribution allowed for savers who have no earned income is $0. If this person remains unemployed in the new year, he cannot make contributions to an IRA. Once he finds a new job, he can make contributions up to the amount of his earned income. I also really must clarify some items in her copy: Traditional IRA contributions are only deductible for people under certain income limits and Roth IRA contributions are only available to people who meet certain income guidelines and these contributions are not taxed, but, instead they are made with post-tax money – a big difference.

Bonds: This one seems way off. The entire idea of a 401(k) or Traditional IRA is to defer taxes until retirement, or, in the case of a Roth IRA or Roth 401(k), to save tax-free. Bonds are one of the most heavily taxed investments. Bonds pay dividends regularly and those dividends are taxable (unless you hold municipal bonds), compared to stocks or stock mutual funds which may pay fewer dividends and appreciate in value, which is only taxed when the investment is sold. Additionally, bonds can be difficult to research and it can take a great deal of capital to purchase just one bond. Finally, if bond rates are low today, you are stuck with a low interest rate for as long as takes until your bond matures.

If you are lucky enough to have so much additional cash that you would like to save for your retirement above and beyond your employer-sponsored plan and IRA, think about an appropriate, low cost, broad market mutual fund or ETF that truly meets your long-term needs.


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