Many people end up cash-strapped in retirement because they aren't able to save consistently for their senior years. If you're in a position where you're thinking of maxing out your 401(k) plan, you're clearly in a different boat.
Because 401(k) plans come with generous contribution limits -- $23,500 for savers under 50 and $31,000 for savers 50 and over effective for 2025 -- these accounts make it possible to build up a large retirement nest egg by maxing out. And as a bonus, many 401(k) plans offer some type of employer matching contribution. That can equate to free money for your senior years.
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Still, maxing out a 401(k) isn't automatically the smartest financial move. Before you assume it's the right thing to do, you may want to ask yourself these key questions.
1. Am I happy with my plan's investment choices?
Some people don't want to be bothered with having to choose investments. And there's actually nothing wrong with that.
Researching companies and tracking stock prices isn't for everyone. And if you'd rather dump your money into a broad market index fund, then you may have no problem keeping your nest egg in a 401(k).
However, if you're the type of person who likes investing, and you want the most amount of control possible over your portfolio, then you may want to look outside of a 401(k). One major drawback of these plans is that they generally do not allow you to hold stocks individually.
IRAs, on the other hand, do. If that's of interest to you, you may want to contribute enough to your 401(k) so that you get your complete employer match, but then put remaining funds into an IRA before maxing out.
2. What fees am I being charged?
There are two types of fees you may be looking at in your 401(k). The first are investment fees, which hinge on the funds you choose.
Generally speaking, actively managed mutual funds will charge higher fees (called expense ratios) than passively managed index funds. So you do, to some extent, have the ability to limit the investment fees in your 401(k).
On the other hand, 401(k)s also charge administrative fees -- the funds associated with running your plan. Those aren't something you can control. So if they're high -- meaning, well above the 1% mark -- then you may not want to max out your 401(k).
3. Is there a good chance of me retiring early?
Early retirement is something a lot of people dream about. If it's a goal of yours, and you're saving aggressively to make it happen, then you may not want to max out your 401(k).
As is the case with IRAs, 401(k)s typically impose a 10% early withdrawal penalty if you take distributions before turning 59 and 1/2. There's an exception to this rule for people leaving the company sponsoring their 401(k) in the year they turn 55 or later. In that scenario, you may be able to get at your 401(k) funds penalty-free a bit sooner than 59 and 1/2.
Otherwise, though, you could end up in a situation where you're financially ready to retire early, only your money is trapped in an account where you'll get penalized for accessing it. So if you're serious about retiring early, you may want to only put some of your long-term savings into a 401(k), and put the rest into a taxable brokerage account for more flexibility.
There's no question that 401(k)s make it easy and convenient to save for retirement. But don't assume that maxing out is automatically the right choice. You may want to explore other options that allow you to invest the way you please, limit fees, and take withdrawals whenever you see fit.
