Retirement Retirement Planning

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.

By Olivia Christensen

Edited by Ellen Cannon

Updated May 28, 2024

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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 to prepare yourself financially 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.

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Your employer doesn’t match your contribution

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.

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The fees are too high

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

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.

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You can save big with a 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

While saving for a stress-free 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 windstorm, things happen.

If your only savings are 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

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 to automatically transfer a portion of your paycheck every month.

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You may have debt to pay down

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

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

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.

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