Keeping More Than This Amount in Your 401(k) Could Be a Bad Idea

Between fees, debts, and taxes, you might want to think twice before maxing out your 401(k) contribution.
Updated April 11, 2024
Fact checked
safety box in hotel room

We receive compensation from the products and services mentioned in this story, but the opinions are the author's own. Compensation may impact where offers appear. We have not included all available products or offers. Learn more about how we make money and our editorial policies.

There are several factors to consider when deciding how much you want to contribute to your 401(k) because you may not always want to contribute the full amount. Perhaps you need the money for something else now, or you can invest in a Roth IRA that has tax advantages that your 401(k) doesn’t.

Here are eight reasons you might want to rethink putting all your nest eggs in one basket.

Your employer doesn’t match your contribution

fizkes/Adobe annoyed female CEO gesturing rejecting mad business client

One major reason you might not want to invest too much money in your 401(k) is if your employer doesn’t match your contribution. Having your employer contribute to your retirement savings is a huge incentive, but not all employers offer a match.

If yours doesn’t, you might want to find a higher-yielding investment or an IRA with more investment choices.

The fees are too high

Damir Khabirov/Adobe holding utility bill with high rates

Look into the fees you might be paying as part of your 401(k) plan. One thing about saving for the future on autopilot is that you don’t necessarily know how much you are paying for the privilege.

Many 401(k) plans come with a slew of administrative fees. Now, to be fair, many of these fees are expected and proportional, but not always. You may check your employer-sponsored retirement program and realize that not only can you do better elsewhere, but you probably should.

You can invest better than the company 401(k) plan

auremar/Adobe stressed businessman at his desk with head in his hands

Deciding how to save for retirement can feel overwhelming, which makes your employer-sponsored retirement savings an easy solution. But a traditional IRA might be a better option for you. Like a 401(k), you typically won’t have to pay taxes on contributions until it’s time to withdraw them.

An IRA generally won’t have fees as high as 401(k) plans often have, and you can shop around for one with low fees. An IRA may also give you a wider range of investment options.

You can save big with a Roth IRA

LIGHTFIELD STUDIOS/Adobe senior couple holding notebook with roth ira

Roth IRA plans are taxed differently than 401(k) plans and traditional IRA plans. With a Roth IRA, you contribute after-tax money, and then you withdraw it tax-free when you’re retired.

This could protect your future self from paying taxes on a fixed income. It also means that if you are in a lower tax bracket now and a higher tax bracket later, you could reduce the amount you end up paying in taxes.

You can contribute to an emergency fund

H_Ko/Adobe depositing some extra money in future needs

While saving for retirement should be a top priority during your working years, you need to have an emergency fund now.

Saving enough “just in case” money to financially survive any curveballs life throws will help you stay out of unnecessary debt. Whether it’s losing a job, a lengthy hospital stay, or losing your roof to a wind storm, things happen.

If your only savings is your 401(k), you may find yourself tempted to withdraw your money early and accept the penalties. Instead, it’s good financial planning to set aside some of your income for an emergency fund, which will keep you from raiding your 401(k).

You might want to save toward other goals

olezzo/Adobe young woman traveler watches a beautiful sunset on the rocks on the beach

You are able to pay your bills each month, put some money toward retirement savings, and you’ve got an emergency fund. But what if you have other financial goals? You may want to fund those as well.

Whether your dream is a business endeavor or a summer in Italy, putting a chunk of your income into a 401(k) may leave you with less money for those financial goals. A better option might be to set up a savings account that you automatically transfer a portion of your paycheck to every month.

You may have debt to pay down

Rawpixel/Adobe couple managing the debt

What is the use of major retirement savings if you head into retirement with the same auto loans, mortgage, and credit card debt you have now? A significant part of successful retirement planning is paying down your debt so that when you have less income, you will have less going out.

Figuring out how to pay off debt within the parameters of your income can be tricky, but looking at your 401(k) contribution might be an option. Before you max out your 401(k) contributions, you need to make sure you’re chiseling away your debt as quickly as you’re approaching retirement.

You want to balance your present with your future

xavier gallego morel/Adobe woman hand holding a balance

The future can be terrifying because we simply don’t know what it will hold. This makes investing money in a 401(k) a reassuring practice. But make sure you have enough money now to live in the house you want, shop at your preferred stores, and travel in comfort. It’s as important now as it will be later.

Before you decide how to invest money for your future, weigh your present lifestyle needs against your future needs. Finding a balance is crucial to enjoying a decent quality of life both now and later.

Bottom line

thodonal/Adobe retirement savings concept on a laptop screen

There are limits to how much you can contribute to your 401(k). The 2023 tax year limit for individual contributions to 401(k) plans is $22,500, while the 2024 tax year limit is $23,000. While saving $23,000 a year is certainly impressive, if you exceed that limit, you will get hit with a 10% tax penalty. Most employers protect you from going over the legal limit, but if you change employers in the middle of the year, you may find yourself in a bit of a pickle.

Preparing yourself for retirement is crucial, and using a 401(k) is the easy and automatic retirement savings plan that you hope will cover your future. Still, you need to make sure maxing out your contributions reflects your priorities and makes sense for your life. Considering other uses for cash besides a 401(k) could help you enjoy your life now and in the future.

CloudBank 24/7 High Yield Savings Account Benefits

  • Incredible 5.24% APY1 to boost your savings
  • Powered by Raisin's intuitive savings marketplace
  • Interest is compounded daily and posted to your account monthly
  • Smart digital bank that can help you reach your goals without having to wait in lines
  • Enjoy 24/7 online access to your account and funds
  • FDIC insured through Third Coast Bank SSB, no fees, $1 minimum deposit
  • Limited Time Bonus: Earn up to $2,000 when you refer friends and family to Raisin. Visit site to learn more.

Author Details

Olivia Christensen Olivia Christensen is a freelance writer and columnist whose work has been featured in HuffPost, Business Insider, and more. She lives in Kansas City, Missouri, with her husband and three kids, and when she isn't writing, she's probably hiking.

Want to learn how to make an extra $200?

Get proven ways to earn extra cash from your phone, computer, & more with Extra.

You will receive emails from Unsubscribe at any time. Privacy Policy

  • Vetted side hustles
  • Exclusive offers to save money daily
  • Expert tips to help manage and escape debt