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If you have a 401(k) plan available to you at your workplace and you're participating in it, routing a certain percentage of each paycheck to your 401(k) account regularly, that's great! Those tax-advantaged accounts can really help people save for retirement.
But 401(k) plans aren't perfect, and you may want to think twice before maxing out contributions to your 401(k) account. Here are some reasons why.
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Employer-sponsored 401(k)s come in two main varieties: traditional and Roth, just as there are traditional and Roth IRAs.
With a traditional 401(k) or a traditional IRA, you typically get an upfront tax break: Whatever sum you contribute for a certain tax year can be deducted from your taxable income for that year.
With a Roth 401(k) or a Roth IRA, your contributions are made with after-tax money. You get no upfront tax break, but if you follow the rules, you can eventually withdraw money from your Roth account tax-free! If you manage to accumulate hundreds of thousands of dollars worth on investments in a Roth account, imagine being able to withdraw it all tax-free in the future -- that's a powerful benefit!
Another key thing to know about these accounts is that they have annual contribution limits -- and those for 401(k)s are far larger than those for IRAs. For 2025, the 401(k) contribution limit is $23,500, with an additional $7,500 "catch-up" contribution allowed for those 50 or older -- totaling $31,000. Thanks to the SECURE 2.0 Act, some older folks get an even bigger catch-up contribution: Those aged 60 to 63 by the end of 2025 can contribute an extra $11,250 in 2025, for a grand total of $34,750.
The IRA contribution limit for 2025 is $7,000 -- or $8,000 if you're 50 or older. (Note that if you have several IRA accounts, this limit is for all of them, so you can contribute $5,000 to one and $2,000 to another, but not $7,000 to each.)
Clearly, with such steep contribution limits, 401(k) accounts can really help you sock away big sums for your future. But understand and consider a few things before doing so:
Given all that, the best approach is to have a strategy. Weigh your options while keeping your needs and preferences in mind. For example, with your money available for saving and investing:
So don't automatically aim to max out contributions to your 401(k) without considering other uses for some of that money. You might want to invest some dollars elsewhere or use it to strengthen your financial health in other ways.