The end of 2023 will be here before we know it. At this point, you may be in the process of making a list of the financial goals you want to tackle before the year comes to a close, and one of those items may be to max out your 401(k).
In theory, maxing out a 401(k) is a great idea. The more money you're able to pump into your retirement plan, the more of a nest egg you stand to accumulate.
Plus, traditional 401(k)s offer a tax break on your contributions. So if you're able to max out before the end of the year, you can shield extra income from the IRS.
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But believe it or not, maxing out a 401(k) does not always pay. If these three scenarios apply to you, you may not want to push yourself to max out over the next couple of months.
1. You don't have a complete emergency fund
You'll absolutely need money in retirement to cover your various living expenses, from housing to healthcare to food. So it's easy to see why you might choose to prioritize retirement savings. However, if you don't have a complete emergency fund -- one with enough money to cover at least three months of essential living expenses -- then it's better to prioritize your near-term savings over your long-term savings.
If you don't fully load your emergency fund, you might end up with expensive debt in the event of an unplanned bill or the loss of your job. Plus, without an emergency fund, you may feel compelled to tap your 401(k) plan early to access money when you need it.
Taking a 401(k) plan withdrawal prior to age 59 1/2 will generally result in a 10% early withdrawal penalty, whereas tapping a savings account won't cost you anything. So if your emergency fund needs work, hold off on maxing out your 401(k) until it's complete.
2. The fees are high
Some 401(k) plans charge costly fees that can eat away at your returns to a large degree. If that's the case for your 401(k), and you've already contributed enough to that account to snag your full employer match, then you may want to consider putting remaining funds you have available for retirement savings into an IRA instead.
With an IRA, you may be looking at lower fees -- both due to having lower administrative fees and getting more choices with your investments. And there's no reason to lose more money to fees when you could lose less.
3. You want the option to pick stocks for your retirement portfolio
Some people are more than happy to invest their 401(k)s in target date or index funds. Both options effectively allow you to take a "set it and forget it" approach to retirement investing, which may be exactly what you want.
But if you're a relatively savvy investor and are willing to do the work involved in picking stocks, then you may want to reserve some of your retirement funds for an IRA instead of a 401(k). With a 401(k), you can't buy individual stocks, whereas with an IRA, you can.
The ability to buy stocks gives you more control over your retirement portfolio. That could result in fewer fees, stronger returns, and a higher level of comfort in your long-term savings. All of these things are important.
Maxing out a 401(k) is no easy feat, so if you're in a position to be able to do that, it's pretty awesome. But just because you have the money available to max out a 401(k) doesn't automatically mean you should do so. You may instead want to consider putting more money into near-term savings or an IRA for a wider range of investment choices.
