Should You Max Out Your 401(k)?

Maxing out a 401(k) isn't the best choice for everyone, even if you can afford it. Here are four things to consider first.
Reviewed by Michael Randall
maxing out 401(k)

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It’s in the air: Americans feel they aren’t saving enough for retirement. And in the wake of a global pandemic, war, record-breaking inflation and stock market volatility, it can be hard to know where to start.

If you’ve read any personal finance advice, you probably believe the best bet is to save, save, save. The maximum 401(k) contribution is $20,500 in 2022 ($27,000 for those age 50 or older) and $22,500 in 2023.

But depending on your financial situation, putting that much into an employer-sponsored retirement account each year may not make sense. Rather, you may want to fund other accounts first. Here are four things to consider before you max out 401(k) contributions.

1. Non-retirement goals

While you’ll be grateful for what you save now once the time comes to retire, it’s important to think of the big picture: What other goals do you have between now and then?

Clients regularly ask whether they should max out 401(k) contributions — and sometimes they’re surprised by the answer, says Jeff Weber, a certified financial planner and wealth advisor at Titus Wealth Management.

“Most people think that putting extra money aside for retirement is the best policy,” he says. “But we like to take a look at the big picture and make sure they’re covered in other areas, too.”

As part of the decision process, Weber ticks through a checklist with clients:

Generally, Weber wants his clients to have these goals in place before maxing out a retirement plan. But if they don't, he still urges clients to contribute the minimum to get their employer’s match for a company-sponsored retirement plan, if it’s offered. Even after the checklist is completed, clients may want to save for a down payment on a house or fund an IRA before deciding to max out 401(k) contributions, Weber says. “It really depends on a client’s goals.”

» See how your contributions will add up with our 401(k) calculator.

2. Today vs. tomorrow

Retirement planning is a balancing act of putting money aside for later, while keeping enough readily available to pay for stuff now or in the near future. Wait too long to start saving and you’ll have to play catch-up later. Save too much now and you may need to raid your retirement account (which often incurs a 10% tax penalty if you’re under the age of 59½).

The statistics on retirement savings can be depressing, with few people on track to meet their retirement goals.

As a result, the knee-jerk reaction for many advisers is to encourage people to max out savings — and even max out a 401(k), says Rick Irace, chief operating officer at Ascensus. “But that’s not realistic for everyone.”

Many companies will match a certain amount of your retirement contributions as a benefit, which is fairly common among employers that offer retirement plans. While the amount varies, it’s free money for those who contribute to their plans.

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3. Other investment options

OK, so you have all your financial ducks in order and are able to set aside the full contribution. Is it time to max out 401(k) contributions? There are other options to consider. Deciding where to invest money beyond the amount required to meet your company’s match limit primarily comes down to taxes and fees.

If the fees in your employer-sponsored plan are high, direct additional money to a traditional or Roth IRA. Keep in mind that the contribution limit is much lower — $6,000 in 2022 ($7,000 if age 50 or older) and $6,500 in 2023 ($7,500 if age 50 and older) — and Roth IRAs have income limits. If your income is $129,000 and above as a single person or $204,000 and above as a married person filing jointly, the amount you can contribute gradually phases out. That said, if you have spare money after maxing out your IRA accounts, funnel it back into the 401(k).

When choosing between the traditional and Roth variety of an IRA or 401(k), the difference comes down to when you’ll be taxed. In traditional accounts, contributions are pretax and distributions in retirement are taxed; with Roth accounts, contributions are made after taxes but retirement distributions are tax-free. (Learn more about traditional and Roth IRAs.)

Another perk of both types of IRAs? These accounts typically have a broader assortment of investments, such as exchange-traded funds. If you’re in a place financially where you can max out a 401(k) and IRA without jeopardizing other goals, do it, Irace advises.

» Learn more: What are ETFs?

If you're looking for either a traditional or Roth IRA, explore our top-rated brokerages below, or check out our roundup comparing even more brokerage options.

4. Whether it's time for a financial advisor

If you still have questions or concerns about managing your investment portfolio, you may also want to consult a financial advisor for personalized financial advice. A variety of financial planners exist for every need and budget.

Look for an advisor or planner who is a fiduciary, which means they are legally obligated to act in your financial best interest, not theirs. A certified financial planner could help you build a comprehensive financial picture and plan for your goals. An investment advisor can offer you personalized investment advice and management for a fee. And if you have significant resources to invest, a wealth manager can connect you to an array of high-end services, including estate and tax planning.

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