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Should I max out my 401(k)?

Maximizing your retirement savings can sound enticing, but consider other financial obligations you may have missed.

If you make enough income to max out your 401(k), doing so may sound like a no-brainer. But if you have other financial obligations to meet or if your 401(k) plan is stomped by high fees and poor investment options, you may want to reconsider.

What should I consider before making the maximum contributions to my 401(k)?

In 2021, the most you can contribute to your 401(k) is $19,500 ($26,000 if you’re 50 or older).

But remember: you’re locking that money up. You’ll incur a 10% penalty tax if you withdraw any amount from your 401(k) before reaching age 59.5. The withdrawal would also be considered taxable income, meaning you’d owe federal income tax on it.

What financial goals should I meet before making the maximum contribution to my 401(k)?

Before maxing out your 401(k) for the year, make sure you can meet other financial obligations.

  • Paying for basic necessities: Make sure you have enough money for your rent or mortgage, groceries and other bills.
  • Paying off debt: If you have a lot of high-interest credit card debt, personal loans, student loans, car loans or other debt, be sure to pay these off before you consider maxing out your 401(k) contributions.
  • Building an emergency fund: Most financial planners recommend having at least three to six months’ worth of basic living expenses set aside in a high-yield savings account.
  • Paying for healthcare expenses: Make sure you can afford health insurance that meets your needs.
  • Saving for college: If you have children, you may want to save for their college education by contributing to a 529 college savings plan or Coverdell ESA.
  • Insurance needs: If you’re married or have children, consider life insurance. If you’re nearing retirement, you may want to look into long-term care insurance.
  • Estate planning: You may want to consider establishing a will or opening a basic trust to ensure your assets are passed on to your loved ones while sheltered from high tax burdens.

What should I know about my employer’s contributions to my 401(k)?

Most financial planners recommend you contribute at least enough to meet the company match if your employer offers one. If it does, your employer will contribute as much money to your plan as you do –– up to a certain amount.

The rules vary across employers. For example, your employer may match your contributions up to 5% of your salary as long as you contribute at least 3% to your 401(k) plan.

But also be aware of words like “vesting.” A vesting period is how long you need to be with the company to keep all your company matches. For instance, your company may make you 50% vested after one year and 100% vested after two years. So if you leave the company within a year after joining, you can leave with just 50% of those employer matches.

Also, be aware of contribution limits. When factoring in employer matches, the most that can be contributed to your 401(k) plan for 2021 is $58,000 ($64,500 if you’re 50 or older.)

What other retirement investments should I consider?

If your 401(k) plan has high administrative fees and poor investment options, it may not be worth it to contribute more than what it takes to meet the company match.

But you can move spare retirement savings to other accounts that offer better benefits. For example, most traditional and Roth IRAs offer far more investment options than 401(k)s. And some providers charge little to no management fees.

You can also consider opening a health savings account (HSA). You can think of an HSA as a 401(k) for your healthcare expenses, which may be considerably high for many of us when we reach retirement. You can open one if you have a high-deductible health plan (HDHP).

Here’s an overview of other retirement savings accounts you can use:

AccountBenefitsContribution limits for 2021
Traditional IRA (individual retirement account)
  • Tax-deductible contributions
  • Money grows tax free
  • Vast investment options
  • $6,000
  • $7,000 if you’re 50 or older
Roth IRA
  • Tax-free withdrawals at retirement (Age 59.5)
  • Money grows tax free
  • Withdraw your contributions, but not earnings, tax free
  • $6,000
  • $7,000 if you’re 50 or older
  • Tax-deductible contributions
  • Money grows tax free
  • Tax-free withdrawals on qualified health expenses
  • Vast investment options
  • $3,600 for self and $7,200 for family plan
  • $4,600 for self and $8,200 for family plan if you’re 50 or older
Brokerage account (Taxable account)
  • Withdraw money without penalty when needed (but you’ll owe capital gains taxes and other applicable taxes)
  • None

Under what circumstances should I max out my 401(k)?

Maxing out your 401(k) isn’t always a risky move. Under the right circumstances, it can make perfect sense and can reward you handsomely.

Let’s say you’re 35 and you contribute the maximum 401(k) contribution of $19,500 this year. If you do that every year for the next 30 years, your investment can grow to $1,982,452, assuming a 7% annual rate of return.

But only consider taking this route if you can check off the following:

  • You’re financially stable
  • You’ve paid off high-interest debt
  • You can meet your financial obligations and have an emergency savings fund
  • Your 401(k) plan is a high-quality one that offers low fees and high-performing investment options

For the best retirement guidance, we recommend you seek a qualified financial advisor and tax professional.

Under what circumstances should I refrain from maxing out my 401(k)?

If maxing out your 401(k) means staying under high-interest debt for a long time, you may want to reconsider. The longer you pay off your debt, the more you’ll pay in the long run. And that money is not working for you.

And remember that emergencies happen. This is why having an adequately funded piggy bank that you can quickly smash is crucial. If you find yourself tapping into your 401(k) for emergency expenses, you might get hit with a heavy tax bill.

The rush of turning $19,500 into a million bucks can be enticing, but you should avoid it if it means you can’t afford basic needs or emergency expenses.

Compare retirement accounts

Whether you want to max out your 401(k) or just contribute more, it’s important to compare retirement accounts. Choose the one that best suits your needs.

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$1 per month
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$0 per month
Stocks, Cryptocurrency
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0.25% on balances up to $99,999

0.4% on balances of $100,000+
Stocks, Bonds
Betterment's automatic investment site aims to improve your returns and support good financial habits with passive investing and financial planning support.

Compare up to 4 providers

Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.

Bottom line

You shouldn’t max out your 401(k) unless you’ve met or can meet all major financial obligations and you have a high-quality 401(k) plan. But a 401(k) is just one piece of your retirement planning puzzle.

You may find it beneficial to divide savings across a traditional or Roth IRA. Most brokerage firms offer these, but some may fit you better than others. Check out our stock trading guide for some examples.

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