Worried about layoffs? When to cut back on your 401(k) — and where that money should go

Company-wide layoffs amid rising AI spending have been a recurring headline this year.

One question we see concerned employees asking on social media is, "Should I pull back on my 401(k) contributions to have more cash on hand if my company is having massive layoffs?"

The reality is that it's more about having a strategy rather than making any quick moves. While having cash on hand during uncertain times can be more valuable than maximizing your retirement saving in the short term, you don't want to totally sacrifice long-term growth if you don't have to.

If you anticipate possibly losing your job and you want to play it safe, here's some advice.

Your first step of action is calculating how much emergency savings you have.

"If you don't have the current self stable with short-term volatility, such as a layoff, then that needs to be the priority," says Autumn Knutson, a Tulsa, OK-based CFP and founder of Styled Wealth, who doesn't endorse any particular products mentioned in this article.

In this case of uncertainty, you should lower your 401(k) contributions temporarily if you don't have a solid emergency fund, which is defined as three to six months of essential living expenses. That cash can then be redirected into a high-yield savings account where your money is safe, accessible and offers a somewhat decent return. This way, you're boosting the cash you have on hand to buy time and reducing stress if layoffs do end up happening.

Knutson also adds that you can make up for the pause by contributing at a higher rate once your income is stable again. So, reduce how much you put into your 401(k) just enough to increase your monthly income and reassess in a couple months when you have a better idea of layoffs.

Compare the top high-yield savings accounts

If you already have a solid amount of emergency savings in place while worried about layoffs, it's worth still contributing to your 401(k) — this is especially true if your employer offers a match. A 401(k) employer match is essentially free money, so, at a minimum, contribute enough to earn that full match.

"That match is great for your future self," Knutson adds.

If the latter fits your situation — you're worried about layoffs, but you have short-term savings and can still contribute enough to your 401(k) to meet your match — there's a good argument for adding a Roth IRA to the mix. Cap your 401(k) contribution at the match amount then take any extra cash you were contributing and open a Roth IRA to supplement your retirement savings.

A Roth IRA operates differently from a 401(k) in that you're contributing after-tax dollars so your money grows tax-free. IRAs in general tend to have more investment fund options than 401(k)s, too. A Roth IRA also gives you flexibility in uncertain times since you can withdraw your contributions (not earnings) at any time without taxes or penalties.

You can open a Roth IRA at big-name brokerage or through a robo-advisor:

At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Autumn Knutson, certified financial planner and founder at Styled Wealth, a fee-only RIA serving impact-driven people.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every investing article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of investment products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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