How Much Will My 401(k) Grow if I Stop Contributing?

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Nearly 87% of employees with 401(k)s contributed to them in 2023, according to the American Society of Pension Professionals & Actuaries. However, any number of situations could prompt you to stop contributing. The good news is that your 401(k) can continue to grow even if you never contribute another cent from your pay.

How Does a 401(k) Grow Over Time?

Your 401(k) account grows in three ways: contributions to your account, appreciation of assets in your account and compounded returns on your investment.

1. Contributions

Contributions come from money you contribute to your account as well as any funds your employer contributes.

2. Performance

Your 401(k) statement balance equals the values of all the investments within your account. When those investments increase in value, so does your statement balance.

3. Compound Growth

Your 401(k) growth compounds like interest in a savings account. Say, for example, you invest $1,000 in a mutual fund that grows 10% per year. In the first year, you earn 10% — about $100 — on your $1,000 investment. That $100 gets reinvested, so in the second year, you earn 10% on $1,100. Think of compounding as supercharging your contributions and investment performance.

Does Your 401(k) Keep Growing After You Quit Contributing?

Contributions are just one of three factors affecting the growth of your 401(k). If you stop your contributions, the other two factors — performance and compounding — can continue to drive your 401(k) balance up. But that growth will be considerably slower than if you’d continued the contributions.

Here’s a look at how a $10,000 401(k) might continue to climb with no future contributions and with additional contributions of $500 per month. In this example, the account gains 6% per year:

Investment Choices and Their Impact on Growth

You can invest your 401(k) money in any of the investments offered by the plan. They usually consist of mutual funds and exchange-traded funds, which are baskets of investments selected by the fund managers. Funds’ growth rates often correlate to the risk levels of the types of investments within the funds.

• Stocks: Stock funds are relatively risky, but they can also produce large returns.
• Bonds: Bond funds are more conservative than stocks and, as an asset class, produce lower returns.
• Cash: Money market funds hold cash and cash equivalents like Treasury securities. They pose the lowest risk of loss but usually have lower returns than bond and stock funds.

Each of these classes of funds might have individual funds that are more or less risky than average.

When To Stop Contributing to Your 401(k)

Your 401(k) provides a tax-advantaged way to save for retirement, but you might have good reasons for pausing your contributions or stopping them altogether.

You Can’t Afford To Contribute

If your financial situation has changed for the worse since you began contributing, you might have no choice but to stop contributing, at least until you’re on more solid footing.

You Don’t Have Emergency Savings

An emergency fund to tide you over in the event of a sudden hardship, such as lost income or an unexpected expense should be your first priority.

You Have Credit Card Debt

High-interest debt threatens your financial stability and can cancel out any gains your retirement investments might be producing.

Your Employer Doesn’t Offer a Roth 401(k)

If you’ll need the tax break more after you retire than you need it now, a Roth 401(k) might be a good option for you. If your employer doesn’t offer one, however, it might be time to stop contributing, especially if your employer doesn’t match your contributions.

You Don’t Need the Money

Once you have all the money you need for retirement, there’s not much point in continuing to contribute. Although you do get tax benefits, an accountant or financial planner might be able to suggest better ways to shield your income.

Market Volatility

Generally speaking, a bad market is not a good reason to stop contributing to your 401(k). Contributions you make during down markets reduce the overall average price you pay per share. If you’re nearing retirement, though, you might consider putting the money in a high-yield savings account instead. Having extra uninvested cash on hand could save you from having to take money out of your 401(k) at a loss.

The Long-Term Impact of Stopping 401(k) Contributions

Pausing your 401(k) contributions could cause you to miss out on tax breaks in the short term. But the long-term consequences are more far-reaching.

For one, you’ll lose out on some compounded gains. The further you are from retirement, the bigger that loss will be.

As the earlier example showed, compounding boosts the growth of your contributions. Over 30 years, a $10,000 balance growing at 6% per year would give you six times as much as you’d started with if you didn’t make any more contributions. Compare that to the $562,483 you’d have after contributing $500 per month. Over 30 years, 19 times the contributions produce 562 times the growth.

If, in addition to stopping your contributions, you also withdraw money before age 59½, you pay an even higher price:

• Additional loss of appreciation and compounded gains
• Income tax on the withdrawal
• 10% tax penalty for early withdrawal unless it was for an IRS-approved hardship

How To Keep Your Retirement Growing Without a 401(k)

A 401(k) is one way to save for retirement, but if you decide not to participate, you do have other options.

Individual Retirement Account

You can open your own IRA through an online broker and make deposits into the account throughout the year. Contributions to a regular IRA are tax-deferred. Contributions to the Roth version come from after-tax money, but you withdraw money tax-free in retirement as long as you hold it for at least five years.

Health Savings Account

If you have an HSA-eligible high-deductible health plan, you can open an HSA and get triple tax incentives. You contribute pre-tax money, it grows tax-free and you make tax-free withdrawals for qualified medical expenses. After you turn 65 and retire, you can continue using any remaining funds tax-free for qualified medical expenses or pay income tax on withdrawals for anything else.

Individual Brokerage Account

A regular brokerage account has no limits on when you can make withdrawals or how you can use the money.

High-Yield Certificate of Deposit

A high-yield CD locks you into an interest rate for a set period, such as 12 or 24 months. You can open several CDs of varying maturity dates to create a “CD ladder,” and either take out the money as each CD matures or reinvest it in another CD.

High-Yield Savings Account

A high-yield savings account can earn similar yields as a CD without restricting access to your money. The catch is that the rate is not guaranteed.

Can You Restart Contributions to Your 401(k)?

You can restart your contributions if your situation changes. The exact process depends on the plan and your employer, but it’s typically a matter of changing the percentage of your salary to defer from 0% to the percentage you want to contribute. Contact the plan administrator for instructions.

While you’re restarting your contributions, it’s a good idea to check your investments and how your money is allocated. You can change the percentage of your contributions that goes to each investment and even add investments if you’d like.

Final Thoughts: Should You Stop Contributing to Your 401(k)?

It might give you a sense of security to know you can shift money you’re contributing to your 401(k) to other uses in the event of a financial emergency or shifting priorities. Having those funds available could keep you out of debt or help you pay off existing debt, but at the expense of your 401(k) growth rate.

The following tips will help you stay on track with your long-term retirement goals even if you pause your 401(k) contributions for now.

• Prioritize emergency savings and high-interest debt repayment.
• Try to keep contributing regardless of what the market is doing
• Invest as much as you can early in your career. Your earliest contributions have the biggest impact on compound growth, so you’ll sacrifice less if you have to pause contributions later.
• Diversify your portfolio by dividing your contributions between stock, bond and money market funds.

Caitlyn Moorhead contributed to the reporting for this article.

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