Should I Max Out My 401k: When & When Not To Max Out Your 401K

In that case, let me cross-question you. What is your current financial state? Are you earning enough to max out your 401k? Have you thought of financial vehicles other than 401k?

How much cash flow do you have every month? Have you considered compounding your fund? Do you have anything to fall back on when push comes to shove? 

Yes, most financial advisers would recommend putting some money away in your investment funds for retirement. But maxing out your 401k contribution might not be the best idea. You must consider a few things before you put money away in your employer’s 401k plan. But you must consider a few things before considering maxing out 401k. Some of those things would be –

• Your current financial situation. 
• Your current salary. 
• Also, your current priorities.

So, should you max out your 401k contributions? Go through this article to find out. 

Should I Max Out My 401k?

Indeed, investing money in 401k or other tax-advantaged investment vehicles with diversified investment options has the benefit of compounding. Such retirement investment can lead to a prosperous retirement. Maxing out the 401k investment funds does provide investment benefits. However, it is not the best practice for everyone to follow. 

So, how much should you contribute to 401K? The max 401k contribution limit for 2023 is $22,500 for an employee contributing to their employer’s plan (for people aged above 50, it is ($30,000).

Although putting away a massive amount of money in your 401k may seem tempting, it may not be the best decision right away.

When Should You Not Max Out Your 401k?

It is okay to put away money for the future and invest in a plan. But you cannot put your current time and situation at stake to do that. 

Does The Funding Take Away The Majority Of Your Income?

First, you must assess the current cash flow you have and the salary you earn. Let’s say that you earn $50,000 per year. So, putting away the maximum 401k amount per year will require you to save more than 40% of your savings. 

Your company’s 401k plan could also have a poor investment lineup. To enquire if investing through an IRA is a good move, compare the account fees and check the mutual fund expense ratio.

If You Are In The Starting Phase Of Your Career

Young workers who switch jobs frequently might also not be eligible for a matching contribution. Yes, it is wise to put your money away for retirement. But there is no shame in lowering the 401k contribution if you are just starting out your career. 

Most of the young employees have frequent cash needs and have difficulty maintaining a cash buffer. For such conditions, it is completely normal to contribute a lesser amount to the 401k during the early career stage. 

Do You Have Other Financial Priorities?

Should you max out your 401k if you have other current priorities? No. You may have a good financial state and regular cash flow. But, you may be dealing with a high-interest debt currently. Many professionals with stable jobs and good cash flow are also pursuing higher education for better job opportunities. 

You may also be willing to marry or buy a house soon. It is the time for building, and opting to reserve in such a situation is not very wise. A huge part of financial planning is to match your financial decisions with your priorities at hand. 

What About Current Financial Wellness?

It is wise to max your 401k contribution. Many investors save at their employer’s plan up to the match while saving for a Roth IRA. They put the rest of their money in a 529 savings account to safeguard their kids or for day-to-day spending. So, keeping your financial health well is more important than just safeguarding your retirement. 

When Should You Max Out Your 401k?

It is also important to safeguard your future through a retirement plan. 401k investment allows you a great opportunity for that by reducing your taxable income. The following conditions call for more of an investment-oriented financial approach-

When You Have A High-Income Tax Bracket

Employees with a high salary tax bracket should invest in 401k to reduce their taxable income. These individuals have already funded emergency savings and secured other areas of their finances.

The maximum savings amount in a 401k plan can also be 10% to 15% of an employee’s annual earnings. For them, it is natural to max out their 401k. 

Maintaining Financial Priorities

You have to live your life even before retirement. You cannot save all for retirement and compromise on current priorities. Before saving on 401k, you must complete some financial priorities as mentioned here –

• First, you must ready an emergency fund that can help you sustain yourself for six months maximum.
• Pay off all the high-interest debts. 
• Ensure your near-term goals that would require significant expenses. 
• Ensure that you have the necessary insurance coverage first. 

Building A Savings Fund

While it may or may not be your time to save more money, building savings is still a necessary financial decision. Data shows that 35% of US citizens have nothing reserved at their employer’s 401K. Also, employees over 55 only have $80,000 or so saved in their 401k.

The said amount may not be enough to retire with for many individuals. So, should you max out your savings to ensure you have enough in your 401k? It depends. You cannot simply focus on saving on 401k or just keep spending without any worry to go through your daily life.

Bottom Line

Should I max out my 401k? The answer to your questions relates more to finding a balance between your current financial priorities and retirement plans. It is also a debate between what’s important now and how to secure the future. What you can do is find a middle ground and balance between them. Save enough in your 401k savings to have adequate retirement funds while maintaining your current and short-term priorities. 

I hope that this article has provided the answer you were looking for. Please comment below to give your feedback regarding this.

Read Also:

• How To Transfer 401k To New Job? Step By Step Guide
• How To Find Old 401k Accounts And What To Do Next?
• The Tax Benefits Of Your 401(k) Plan: Is 401k Tax Deductible?