The Unfortunate Truth About Maxing Out Your 401(k)

Maxing out a 401(k) would require you to contribute a lot of money to your workplace retirement plan. In 2024, the maximum you can invest in your 401(k) is $23,000, and this doesn't include any employer matching contributions. If you are 50 or over and eligible to make catch-up contributions to your 401(k), you are allowed to invest an additional $7,500 for a total maximum contribution amount of $30,500.

It may seem like you'd be setting yourself up for a very secure retirement if you maxed out these contributions or got close to it. Indeed, you would amass a lot of money during your working life if you made the maximum contribution to your 401(k) every year.

Unfortunately, there are some harsh truths about 401(k) accounts that you should come to terms with before you decide this is the right move. Understanding these realities can help you to see why maxing out your 401(k) probably isn't the right choice for most people, even though it's the convenient and easy option.

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Here are the problems with maxing out your 401(k) account

There are a few big problems with maxing out your 401(k) . Here's what they are:

• You're very limited in your investments. Your 401(k) probably offers a few dozen funds. You can't buy individual stocks, and the funds on offer may be more expensive than those you could get if you had access to the full range of investment options a brokerage firm offers. By losing out on the chance to invest in all different kinds of assets you might be interested in, you're limiting your returns.
• You could pay extra fees. Your 401(k) may have administration fees, and, as mentioned above, the investments you're offered may have higher costs than those you could get in other accounts, like an IRA that you could open with a broker of your choosing. These extra fees can really add up over the course of your investing life.
• You're stuck with deductible contributions. Unless your employer offers a Roth 401(k), maxing out your 401(k) means that you are claiming all your deductions up front as you contribute to your account with pre-tax dollars. This may not be the best move, as you may be better off with some money in a Roth, which allows tax-free withdrawals, in case your tax rates are higher as a senior. Putting some money in a Roth can also help reduce the likelihood your Social Security benefits will be taxed since Roth distributions don't count in determining if you hit the income threshold at which benefits become taxable.
• You could miss out on better tax breaks. If you're eligible for an HSA and you don't take advantage of it, you miss out on the only account that provides a deduction for contributions and tax-free withdrawals if you take out money to cover medical expenses as a senior.

These are all very significant downsides to a 401(k). Unfortunately, if you are trying to max out this account, it could leave you with too little money to put in other plans such as an IRA, HSA, or Roth IRA. There's a big opportunity cost to giving up the benefits these other accounts offer, including access to a broader array of investment options.

What should you do instead of maxing out your 401(k)

For all the reasons mentioned above, most people shouldn't max out their 401(k).

Instead, you should max out your 401(k) match , contributing enough to get the full amount of matching contributions your employer is willing to provide to you. Once you've done that, switch to contributing money to other tax-advantaged plans. Only after you've put money into other accounts should you consider going back to add more to your 401(k) if you have money left over.

This approach can provide more diversification, a chance at higher returns and lower fees, and, most likely, a better outcome that leaves you with more money to spend in your later years.

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