The Unfortunate Truth About Maxing Out Your 401(k)

Maxing out your 401(k) might be on your radar if you’re serious about boosting your retirement savings. For 2024, that means withdrawing up to $23,000 if you’re under 50, or up to $30,500 if you’re 50 or older. About 15 percent of 401(k) plan participants achieved that feat in 2023, according to the latest data from Vanguard.

But dipping so deep into your retirement plan at work could mean giving up a big chunk of your paycheck each month. And that could be a big mistake for some people.

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Some 401(k) Pitfalls You Probably Haven’t Considered

Let’s break down some of the cons. First, you’ll need to stick with the investment options in your employer’s plan, which typically don’t offer much variety. You will mostly see target date funds, mutual funds and maybe some company stocks. If you want to invest directly in individual stocks such as Apple or Microsoftyou’re out of luck — unless you work for them. This could mean missing out on potential long-term gains by owning individual stocks.

Plus, you’ll face some fees that could cut into your returns. And if you’re like most people, you probably have no idea what your 401(k) taxes actually look like. These fees may include investment management fees, administrative fees and individual service fees. While they may not seem like a big deal at first, they can add up over time and affect your long-term investment growth.

Generally, you must keep your 401(k) funds locked up until you reach age 59 1/2. This might not be ideal if an emergency comes up and you don’t have a lot of savings outside of the account. Sure, you could dip into your 401(k), but you’ll face a 10% penalty on top of paying taxes. For example, if you have $100,000 in your 401(k), a 10% penalty would immediately take $10,000 off the top, not to mention the taxes you’d still owe. All in all, that’s a nice chunk of change to give up early access.

Don’t forget about other financial goals

It might be easy to throw all your money into a 401(k) and call it a day. Why so? Your employer does the hard work by taking money directly from your paycheck before it hits your account, so you might not miss out, especially if you’re earning a solid income.

But before maxing out your 401(k), you’d be better off splitting your paycheck into several accounts, such as an emergency fund, an individual retirement account (IRA), and a brokerage account. This lowers your chances of dipping into your 401(k) early. Also, investing in other assets outside of your 401(k) could provide more profitable growth opportunities.

All in all, it’s a good idea to weigh the pros and cons of maxing out your 401(k) before you do. There are plenty of enticing advantages — many of which I’ve personally taken advantage of over the years. First, the 401(k) contribution limits are much more generous compared to a traditional or Roth IRA, and if you’re lucky, your employer might offer an employer match to help boost your savings. This could speed your way to joining the 401(k) millionaire club, which is pretty appealing. Plus, by lowering your taxable income through 401(k) contributions, you can also lower your tax bill.

However, maxing out a 401(k) may not always be the best move for everyone. Take the time to review your financial situation and personal goals, as well as the details of your 401(k) plan to determine the best strategy for maximizing your retirement savings.