Having access to a 401(k) plan isn't a given. You need to work for an employer that offers one of these plans, and even then, you may not be eligible to participate right away.
But if you do have access to a 401(k) plan, it generally pays to participate in some shape or form. That's because many employers offering 401(k)s also match worker contributions to some degree. And that's free money for your retirement.
But should you be contributing beyond your employer match, to the point of maxing out? That's debatable.
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Recent data from Bank of America found that in 2023, only 7.7% of 401(k) plan participants contributed the maximum amount allowed that year. But even if you're in a position to max out your 401(k) in 2024, you may not want to go that route.
There may be a better savings option for you
To max out a 401(k) plan in 2024, you need to contribute $23,000 if you're under the age of 50 or $30,500 if you're 50 or older. You should also know that funds contributed in the form of an employer match don't count toward these limits. So if you're 30 years old and have a $3,000 employer match coming your way, your 401(k) could get funded to the tune of $26,000 this year.
Contributing enough to your 401(k) to claim your employer match makes absolute sense. But beyond that, you may want to look to an IRA or even a taxable brokerage account for the remaining funds you have available to sock away for retirement.
The reason? One major problem with 401(k)s is that they often limit your investment choices. This can result in not just higher fees than you want to pay, but also a portfolio that you're not so thrilled with.
Now, if you're a hands-off investor, you may find that the investment choices offered by your 401(k) are more than sufficient. You'll commonly find target date funds in 401(k) plans, and frankly, investing on a long-term basis doesn't get much more hands-off than that.
There's nothing wrong with being a hands-off investor in the context of retirement savings if that's what suits you. But if you know a thing or two about picking stocks, then you may want to put some money into an IRA or taxable investment account instead of maxing out your 401(k). That way, you get more control over your investments. With a 401(k), you generally do not have the option to add stocks to your portfolio on an individual basis.
Furthermore, 401(k) plans can impose hefty administrative fees that eat into your returns. With an IRA, your fees could be a lot lower.
Don't assume a 401(k) is a good bet
A big reason only 7.7% of savers maxed out their 401(k)s last year may boil down to the fact that most people couldn't afford to do so. But if you're able to save well beyond your 401(k) match this year, don't assume that maxing out your employer plan is the best move to make. Instead, see if it makes sense to put the rest of your savings into another account that doesn't impose the same sort of fees and is more conducive to meeting your financial goals.
