First, I am operating on assumption that you are following the cardinal rule of saving for retirement: If your employer offers a matching contribution to your retirement plan you are contributing whatever your employer is willing to match?even if it is only a percentage of your contribution and not a dollar for dollar match.



Now, let's assume you have been contributing only the portion that your employer is willing to match and yet you barely have enough money to get by week to week. Does it still make sense to make non-matched contributions or Roth IRA contributions assuming you do not want to reduce your spending? Maybe. (This article does not address Roth IRA contributions vs. non-matched 401(k) contributions and hereafter only refers to non-matched 401(k) contributions).

If you have substantial savings and maximizing your retirement plan contributions causes your net payroll check to be insufficient to meet your expenses, you should maximize retirement plan contributions.

The shortfall for your living expenses from making increased pre-tax retirement plan contributions should be withdrawn from your savings (money that has already been taxed). Over time this process, i.e., increasing contributions to your retirement plan and funding the shortfall by making after-tax withdrawals from an after-tax account, transfers money from the after-tax environment to the pre-tax environment. Ultimately it results in more money for you and your heirs.

Another way to squeeze blood from a stone is to consider an interest only mortgage. The reduced mortgage payment (in contrast to what you would be paying on a 30-year fixed rate mortgage) is deductible as a home interest expense. The additional cash flow from the reduced payment could be used to pay credit card debt or fund one or more tax favored investments. You could open a Roth IRA, make additional retirement contributions, and/or purchase a tax-favored life insurance plan. In the long run, you could be better off, often by hundreds of thousands of dollars. Of course there are risks with this strategy.

Another opportunity to shift savings from the after-tax environment to tax advantaged retirement savings might arise if you are the beneficiary of an inheritance.

Take this ?Changing Your IRA and Retirement Plan Strategy after a Windfall or an Inheritance? mini case study for example:

Joe always had trouble making ends meet. He did, however, know enough to always contribute to his retirement plan the amount his employer was willing to match. Because he was barely making ends meet and had no savings in the after-tax environment, he never made a non-matching retirement plan contribution. Tragedy then struck Joe's family. Joe's mother died, leaving Joe with $100,000.

Should Joe change his retirement plan strategy? Yes.

If his housing situation is reasonable, he should not use the inherited money for a house'or even a down payment on a house. Many planners and people will disagree. Of course it depends on individual circumstances.

Instead, Joe should increase his retirement plan contribution to the maximum. In addition, he should start making Roth IRA contributions. Many of you who live in areas that have seen huge real estate appreciation think he should use the money to invest in real estate. You may have been right yesterday. You might even be right today. It is, however, a risky strategy, unsuitable for many if not most investors.

Assuming he maintains his pre-inheritance lifestyle, between his Roth IRA contribution and the increase in his retirement plan contribution, Joe will not have enough to make ends meet without eating into his inheritance. That's okay. He should then cover the shortfall by making withdrawals from the inherited money. True, if that pattern continues long enough, Joe will eventually deplete his inheritance in its current form. But his retirement plan and Roth IRA will be so much better financed that in the long run, the tax-deferred and tax-free growth of these accounts will make Joe better off by thousands, possibly hundreds of thousands, of dollars.

The only time this strategy would not make sense is if Joe needed the liquidity of the inherited money, or he preferred to use the inherited funds to improve his housing.

Now, do you think you can afford to make the maximum contribution to your retirement plan? The truth of the matter is you cannot afford to ignore my advice and not make the maximum contribution to your retirement plan.