Should You Max Out Your 401(k)?

If you’ve read any personal finance advice, you probably believe the best bet is to save, save, save for retirement, starting with your 401(k), if your employer offers one. The maximum 401(k) contribution is $22,500 in 2023 ($30,000 for those age 50 or older).

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 at The Wealth Consulting Group.

“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:

• Do you have any high-interest credit card debt? If so, pay that off ASAP.

• Have you built up an emergency fund with three to six months of living expenses?

• Do you have adequate health insurance?

• If you’re married or have children, do you have adequate life insurance?

• Do you have adequate disability insurance in case you’re out of work for six months or more because of an injury or ailment?

• Do you have a basic will or trust established?

• If you’re close to retirement age, do you have long-term care insurance?

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.

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.

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

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). But that's not always realistic.

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). You can also contribute so much to your 401(k) that it squeezes your budget in other areas.

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 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 — $6,500 in 2023 ($7,500 if age 50 and older) — and Roth IRAs have income limits. 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, it's worth doing.

» Learn more: What are ETFs?

If you're looking for either a traditional or Roth IRA, check out our roundup of the best IRA accounts.

4. Whether it's time for a financial advisor

If you still have questions or concerns about managing your investment portfolio or juggling a variety of financial goals, 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.

More retirement resources