401(k) Contribution Limits: Maxing It Out May Be a Bad Idea

You might do better by not maxing out those 401(k) contribution limits.

Jul 29, 2014 at 2:15PM

Source: Flickr user _e.t.

If you have a 401(k) plan available to you at work, or a similar 403(b) or 457(b) plan, you should probably make good use of it in order to ensure a comfortable retirement. Thus you'll probably want to know what the 401(k) contribution limits are for 2014 -- you'll find them below.

But for the best results, you might not want to reach those limits.

First, though, know that 401(k) plans are offered by many employers, and they offer the chance to save money on a tax-deferred basis. You contribute pre-tax dollars, thus reducing your current taxable income, and then are taxed on withdrawals in the future. 403(b) plans are quite similar, designed for employees of public schools, churches, and certain nonprofit organizations. 457(b) plans are designed for employees of city, county, and state government entities, along with public schools and colleges. Below are the 457(b), 403(b), and 401(k) contribution limits for this year:

401(k) contribution limits for 2014

Plan type




Basic limit




Catch-up contribution limit for those age 50 and older




Total limit for those 50 and older




*Not available to those who work for tax-exempt employers.

Now that you know the 457(b), 403(b), and 401(k) contribution limits, should you try to max them out? That depends.

Aim for the 457(b), 403(b), and 401(k) contribution limits
One way or another, most of us need to save for retirement -- and save a lot. These employer-sponsored plans are handy tools for that, as they can have you effortlessly and automatically deducting contributions from each paycheck. Better still, many employers will match your contributions to some degree. That's free money, which you can't pass up.

Further, 401(k) contribution limits (as well as those for 403(b) and 457(b) plans) are considerably higher than IRA contribution limits, which are $5,500 or $6,500 for those 50 and older. Thus they let you sock away more, and many people will need sizable nest eggs to retire on. For those who wouldn't do well trying to oversee and manage a handful of retirement accounts, these plans can make things quite simple, requiring little work.

Consider undershooting the 457(b), 403(b), and 401(k) contribution limits
On the other hand, you may not want to max these accounts out. These plans have certain downsides, including:

  • They don't always offer the best selection of investments to choose from. For most investors without the time or expertise to manage their money closely, a simple broad-market index fund or two might be all that's needed. Some plans don't offer them, though. Your account's overall performance can suffer if you're invested too conservatively or aggressively. In an IRA, meanwhile, you can invest in stocks or bonds you choose yourself, as well as certain other investments.
  • The investment options are often expensive. On your own, you can find S&P 500-based index funds that charge you annual fees of less than 0.1% per year. Most 401(k)s sport funds that will charge you much more. In fact, you typically pay a management fee to the plan administrator and to the managers of the funds in which you're invested. The Department of Labor has pointed out that a 1% difference in fees can lead to a 28% difference in ultimate earnings over 35 years. (This calculator may be able to tell you how much you're facing in fees through your employer plan.) 

So, given those concerns, what should you do? Well, remember that you can probably fund an IRA, too. Thus you might contribute enough to your employer plan to receive the maximum employer match but then move on to maxing out your IRA contribution. If you're able to save and sock away more, you can think about maxing out your employer-provided retirement account or perhaps contribute to a regular, non-tax-advantaged brokerage account if you see a lot of great investment opportunities out there.

Look beyond the 457(b), 403(b), and 401(k) contribution limits and see whether you should be investing some of your money somewhere else.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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