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 $23,000 in 2024 and $23,500 in 2025, with additional catch-up contributions available for those age 50 and 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 contributions.

While you’ll be grateful for what you've saved now once you're in retirement, it’s important to step back: 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 goes 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 says he wants his clients to have these goals in place before maxing out a workplace retirement plan. But if they don't, he still urges clients to contribute the minimum to get their employer’s match 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 employees 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 account before deciding to max out 401(k) contributions, Weber says.

“It really depends on a client’s goals.”

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

Retirement planning is a balancing act of putting money aside for later while keeping enough readily available to pay for things 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 tap into your account early, incurring taxes and early withdrawal penalties if you are under age 59 ½.

To account for this, consider how much you can contribute to your 401(k) before it squeezes your budget in other areas. Contributing early and frequently, even if it's a small amount, means that money has more time to grow in your 401(k) plan, thanks to compound interest.

» Learn more: Making an early 401(k) withdrawal

If all your financial priorities are in order and you're able to set aside the full contribution, here comes the next question: Are there other — and better — options available to help your money grow?

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 aren't high and you're offered a variety of investment options, it may be worthwhile to max out your contribution.

If the fees are high, you could consider directing money toward a traditional or Roth IRA first. Keep in mind that the contribution limit is much lower — $7,000 in 2024 and 2025 ($8,000 if age 50 and older) — and Roth IRAs have income limits.

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 qualified 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 considering.

» Find the best IRA account for you.

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 advice. A variety of financial planners exist for every need and budget.