For most ordinary middle-class Americans, an employer-sponsored 401(k) account is their primary retirement savings vehicle. These plans not only simplify the process by diverting a portion of their paychecks to the cause but also allow for greater contributions than you're able to make to individual retirement accounts (IRAs) that are funded, owned, and managed entirely on your own.
There's an unfortunate truth about maxing out your 401(k) contributions, however. Keep reading for a reality check and what you should do about it.
Maximum 401(k) contributions explained
In case you're wondering what "maxing out" your 401(k) means in terms of an actual number, it largely depends on your age. This year, workers under the age of 50 can contribute the lesser of 100% of their work-based wages, up to a cap of $23,500. Meanwhile, employees aged 50 and over can chip in an additional $7,500 to raise their ceiling to $31,000.
Then there's a narrow band of people currently between the ages of 60 and 63 who -- thanks to the 2022 SECURE 2.0 Act -- can tuck away $34,750 of their own salary in a 401(k) account. Just bear in mind that these bigger allowances for older workers are exceptions and not guaranteed to last.
And that's just your salary deferral, by the way. Your employer is allowed to contribute even more. Although most companies don't get anywhere near this number, for 2025, they can contribute up to an additional $46,500 to most workers' 401(k) accounts. The only stipulation is that these combined contributions still can't exceed 100% of the employee's earned wages.
Either way, none of these numbers compares to the contribution ceilings of typical traditional IRAs or Roth IRAs. For 2025, people under the age of 50 can contribute up to $7,000 of their earned income to an ordinary or Roth IRA (no more than 100% of their earned wages), while those aged 50 and up can contribute up to $8,000.
It makes 401(k) accounts sound great, right? And they are, to be sure. Except that maxing out your 401(k) contributions simply because "saving more is better" isn't necessarily all it's cracked up to be for a handful of reasons.
Unfortunate truths about maxing out your 401(k)
Chief among these downsides is the obvious one. That's the budgetary strain that would likely take shape by effectively reducing your salary by between $23,500 and $34,750 per year. Most people simply can't afford that. That's OK if you're one of them.
Numbers from the U.S. Bureau of Labor Statistics put things into perspective, indicating that the nation's median individual annual income at this time is in the ballpark of $60,000. Things improve, but only slightly, when looking at typical total household income.
The U.S. Census Bureau reports that 2023's median yearly household income was just a little less than $81,000. In an environment where the average household is shelling out more than $25,000 per year on housing, $6,000 on food, more than $13,000 on transportation, and over $6,000 on healthcare, there's just not a couple of thousand extra bucks left to funnel into a 401(k) every month.
Sure, you could try to make it work. As most veteran consumers can attest, though, a budget with no margin for error that might force even just the occasional use of a credit card is a short-term solution that creates even bigger long-term problems. Interest rates on credit cards are now routinely -- and outrageously -- in the ballpark of 30%. In many regards, just limiting this sort of borrowing is a wise investment in and of itself.
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That's not the only downside of maxing out your 401(k), though, even if it's the most significant one. Workplace retirement plans are also less flexible than traditional or Roth IRAs. Specifically, it's difficult to access this money before you're retired, even if you're old enough to qualify for a tax-free withdrawal.
Although it's not their intent, under certain circumstances, money held in individual retirement accounts can be prematurely withdrawn, even without incurring the typical 10% early withdrawal penalty. These circumstances include the purchase of a first home, birth or adoption costs, education expenses, some medical costs, and even health insurance premiums if you're unemployed.
While some 401(k) plans allow for hardship withdrawals, many don't. You can often borrow money from your 401(k) account, but you'll still pay (yourself) interest, and the repayment schedule isn't always as flexible as you might like it to be.
That's not the only way that 401(k) accounts are less flexible than IRAs, however. Although you can withdraw money from a Roth* or traditional IRA without penalty once you turn 59 and a half, even if you're still working, many 401(k) plans don't allow distributions while you're still employed, regardless of your age. (*In most cases, the Roth IRA account will also need to have been funded for a minimum of five years to avoid early withdrawal penalties and taxes.)
Sure, for most people, this won't matter. If you think you might need to access even just some of your retirement savings before you're retired or of retirement age, though, it might be best to keep a chunk of this money out of your workplace plan altogether.
A hybrid approach makes the most sense for most
None of this is to suggest that employer-sponsored 401(k) plans are best left avoided, to be clear. Again, there's much to be said for their simplicity and automation.
They also often offer free money. Mutual fund giant and 401(k) plan administrator Fidelity says employers added an average of $4,770 to each worker's 401(k) account in 2024, on top of the $8,800 these employees contributed from their own funds. At the very least, you'll want to max out your own salary deferrals that your company is willing to match.
There's an argument to be made, however, for diverting any retirement savings beyond this matched amount into an ordinary or Roth IRA. If you're in a fortunate enough position to also be able to max out your annual contribution to a non-workplace retirement account like a Roth or traditional IRA -- and you know you won't need to access this money anytime soon -- then reprioritize payroll deposits into your 401(k) account.
It admittedly takes a bit of number crunching to make sure this hybrid approach works for you and your budget. But there's much to be said for maintaining as much fiscal flexibility as possible while saving for retirement. You may never actually need it, but needing this flexibility and not having it can be costly.
