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Should You Max Out Your 401(k)? It Depends…

Should You Max Out Your 401(k)? It Depends…

August 10, 2023

You’ve probably heard that maxing out your 401(k) contributions is the best way to save for retirement—and it makes sense. Maxing out your contribution is both easy and efficient. However, depending on your situation, this might not be the best move. Let’s take a look at a few of the reasons that might be.

You May Have Other Financial Priorities

First, while saving for retirement is important, it’s not the only financial goal you may have. For example, you may be saving for a down payment on a home, paying off debt, or building up an emergency fund. If you funnel all your extra money into your 401(k), these other areas of your finances may end up being neglected. It’s important to make sure you have a well-rounded financial plan that addresses all of your priorities. To start, consider the following to help you assess other potential goals:

  • Would it be better to pay down any high-interest credit card debt?
  • Have you established an emergency fund with 3-6 months’ worth of living expenses?
  • Do you have adequate health insurance?
  • Do you have an estate plan including Powers of Attorney, a basic will and/or trust in place to safeguard your loved ones in your absence?
  • Have you considered disability insurance in case an accident or injury prevents you from working for an extended period of time?
  • If you are married or have dependent children, have you considered obtaining adequate life insurance?

You May Have Access to Better Investment Options Elsewhere

Most 401(k) plans offer a limited selection of investment options, which may not be the best fit for your strategy. Suppose you have other investment accounts, such as an IRA or taxable brokerage account. In that case, you may have access to a wider variety of investment options. 

For example, let’s say your 401(k) plan only offers mutual funds but you’re interested in investing in individual stocks or exchange-traded funds (ETFs). In this case, an IRA or taxable brokerage account may be the better option. By diversifying your investments across multiple accounts, you can improve your returns and invest in the right mix of assets for your financial goals. 

You May Want More Flexibility in Accessing Your Money

Contributions to a traditional 401(k) are tax-deductible, but withdrawals in retirement are taxed as income. Withdrawals prior to age 59.5 are subject to tax and a 10% penalty if you don’t meet the strict criteria for a hardship withdrawal. If you’re planning to retire early or have other income streams in retirement, you may want more flexibility in accessing your money. Roth IRAs, for example, allow you to withdraw your contributions at any time without penalty, and qualified withdrawals of earnings are tax-free. Consider whether a Roth IRA or other investment vehicle might give you more flexibility both now and in retirement.

You May Pay Less in Fees With Other Investment Accounts

When considering whether to max out your 401(k) contributions, it’s also important to take into account the fees associated with these plans. Though 401(k) plans are convenient, they can also be expensive, with costs including administrative fees, investment fees, and expense ratios, among others. These fees can eat into your investment returns over time and can be especially costly if you’re not paying attention to them. Make sure you understand the fees associated with your 401(k) plan and consider whether there are lower-cost investment options available to you. It’s worth seeking the advice of a financial advisor to help you navigate these fees to help you get the most bang for your buck.

If You Do Max Out Your 401(k), Know Your Limits

If you choose to max out your 401(k), it’s important to know your contribution limits. For 2023, you can defer as much as $22,500 into your 401(k). An additional $7,500 in catch-up contributions is allowed for those over 50.

One of the best parts of a 401(k) plan is that many employers offer matching contributions. The most common matching formula is 50% of employee contributions up to 6% of salary. This means your employer will contribute a maximum of 3% of your salary if you contribute 6%. Since employer matches are essentially free money and not considered income in the year received, it’s generally advised to contribute at least enough to get the maximum matching contribution, even if you don’t max out the full contribution amount.

Is Maxing Out Your 401(k) the Best Choice for You?

It’s okay if you’re still trying to decide what the best choice is for you and your 401(k). That’s where we come in. Our goal is to partner with you to look at your financial situation to make sure your contributions make sense for your situation and your future goals. At Center for Wealth Management, we prioritize honesty, integrity, and trust to help you live the life you have worked so hard for. If you’re ready to take that step, schedule a free introductory meeting online, call (248) 220-4321, or email me at justin@cwmfinancial.net.

About Justin

Justin Williamson is a senior partner and co-owner of Center for Wealth Management, an independent, fee-based wealth management company in Troy, Michigan. Justin has been serving clients in the financial services industry since 2001. He spends his days helping his clients pursue their financial goals and make the best decisions for their families so they can spend time on what they love and experience financial confidence. Justin is known for his dedication, integrity, personal touch, and ability to simplify complex issues. Justin specializes in serving engineers and other professionals who are close to retirement or recently retired and helping them maximize their benefits and create a retirement plan they can rely on. He is a seasoned public speaker and presents at numerous corporate events each year on retirement planning, Medicare, Social Security, and other financial topics. Justin has a bachelor’s degree in Business Administration majoring in Personal Financial Planning from Central Michigan University and is a CERTIFIED FINANCIAL PLANNER™ practitioner. 

Outside of work, Justin enjoys spending time with his family. He and his wife, Corinne, have five children between them ranging in age from sixteen to twenty years old. Justin lost his first wife, Heather, to brain cancer in 2020, and thus has experienced firsthand the emotional, mental, and financial challenges spouses and children go through when dealing with such a tragic situation. Outside of work, Justin enjoys coaching or attending baseball, softball, powerlifting, and basketball events, traveling to new locations, and spending time at the family cabin at Higgins Lake. Learn more about Justin by connecting with him on LinkedIn.