A 401(k) is the most popular retirement account and one of the best tools for saving for retirement. It's hands-off and offers a great tax break -- a win-win.
Because 401(k)s play a major role in many people's retirement finances, it makes sense that people would aim to max out these accounts. However, despite how great a 401(k) can be and how important saving for retirement is, I believe aiming to max out your 401(k) is an overrated goal and not the best move for most people.
This may sound counterproductive, but let's take a look at why I believe it.
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Maxing out a 401(k) is not feasible for most Americans
The first issue with maxing out a 401(k) is that it's not feasible for most people.
The most anyone can contribute to their 401(k) in 2025 is $23,500. If you're 50 or older, you can add a $7,500 catch-up contribution, bringing the limit to $31,000. Beginning this year, people aged 60 to 63 can also add an additional $3,750 catch-up contribution (or a total of $11,750), bringing the limit to $34,750.
According to the U.S. Census Bureau, the median U.S. personal income in 2023 (the latest data available) was $42,220, making it virtually impossible for someone to dedicate $23,500, or around 56% of their income, to a 401(k).
Granted, 401(k) benefits like employer matches mean you should, at minimum, contribute enough to get your employer's max match. But you don't want to sacrifice a large chunk of your income to your 401(k) and put your current livelihood at risk or drastically lower your quality of life.
IRAs have benefits that warrant taking advantage of them before focusing on maxing out your 401(k)
The income limitation is the most obvious downside of aiming to max out a 401(k), but an underrated downside is that it can take away from taking advantage of an IRA.
There are two main types of IRAs: Traditional and Roth. A traditional IRA is similar to a 401(k) in that contributions lower your taxable income for the year (assuming other criteria are met). A Roth IRA has a unique tax benefit because you contribute after-tax money and then receive tax-free withdrawals in retirement.
Unlike a 401(k), IRAs aren't tied to an employer and can be opened independently like a standard brokerage account. They provide three key benefits that a 401(k) doesn't: investment flexibility, withdrawal flexibility, and low cost.
The downside to IRAs is that their contribution limits are relatively low at $7,000 annually ($8,000 if you're 50 or older), and they aren't federally protected like 401(k)s. However, they can be a great supplement account worth taking advantage of because of the three benefits mentioned below.
The benefits of taking advantage of IRAs
When choosing investments for your 401(k), you can only choose from the options your plan provider offers you. However, with an IRA, you can invest in essentially any stock or fund you could in a standard brokerage account: Individual stocks, niche funds, bonds, the whole nine yards.
IRAs are also more forgiving for early withdrawals. You can use money for qualified higher education expenses, withdraw up to $10,000 for your first home purchase, and pay for health insurance premiums while unemployed, among other things. None of these exceptions apply to a 401(k).
An IRA is also a mostly fee-free account, meaning the only costs most people face are the fees a particular investment choice may charge. In a 401(k), you have administration fees as well as the fees of your specific investments. This often makes a 401(k) more expensive than an IRA and can eat away at your returns.
A different approach to retirement savings
If you're in a financial position to max out both a 401(k) and an IRA without jeopardizing your livelihood or well-being, perfect. I'm all for maximizing your retirement savings in that case. However, if that option isn't feasible, you may want to consider something like the strategy below:
- Contribute the most to your 401(k) that your employer will match. If they'll match 3%, make 3% your minimum; if they'll match 4%, make 4% your minimum; and so forth.
- Focus on maxing out your IRA, since its contribution limit is much lower.
- Increase your 401(k) contributions to whatever makes sense for your financial situation.
By following the above path, you should be able to take advantage of what both accounts offer. You get the passiveness, tax break, and potential employer match from a 401(k), as well as the flexibility of an IRA. That might just be the best of both worlds.
