3 Good Reasons Not to Max Out Your 401k

Despite what you may have read, it might not be necessary to max out your 401(k) contributions.

How much should you invest in your 401(k)? If you ask 10 different financial planners this question, you'll probably get 10 slightly different answers. And while saving more than you think you'll need for your retirement is generally a good idea, the reality is that it might not make sense to max out your 401(k) contributions each year.

While this isn't an exhaustive list, here are some of the best reasons for not maxing out your 401(k) in 2022.

Reason 1: You want the flexibility of an IRA

One reason why you might not want to max out your 401(k) is to be able to allocate money to an individual retirement account, or IRA. Many workers don't realize it, but if you earn less than a certain amount, you can contribute to an IRA even if you have a 401(k) or other qualified retirement plan at work.

There are a few key benefits to IRA investing. For one thing, if you want the ability to buy individual stocks, you aren't able to do it in your 401(k). In other words, if you wanted to put some of your retirement savings into Amazon stock, an IRA will let you do it. You can also use IRA funds before you reach retirement age to help pay for college expenses, or as much as $10,000 towards a first-time home purchase.

Reason 2: You have non-retirement savings priorities

Another good reason to not pursue a maximum 401(k) contribution is that you have savings and financial goals other than your retirement. For example, if you want to save for a home purchase, your child's education, a new car, or if you have credit card debt you need to pay down, it may not make good financial sense to stuff every possible dollar into your 401(k).

Reason 3: The 401(k) contribution limit is very high for most savers

In 2022, the 401(k) contribution limit is $20,500 for most people, or $27,000 for participants age 50 and older. And this doesn't even include employer matching contributions. To put it mildly, it isn't necessary or practical for most people to put more than $20,000 into their 401(k) every year.

To put this into perspective, let's say that you're 30 years old and max out your 401(k) in 2022. You then contribute another $20,500 every year until you retire. By the time you're 65, assuming 8% annualized returns, you'd have about $3.5 million. And this doesn't include employer contributions or the fact that the annual maximum will likely increase over time. While having this much money to retire with is certainly a good thing, it simply isn't necessary for many people to sacrifice so much in the short term to save so aggressively.

To be sure, if you want to max out your 401(k) and you can comfortably afford to do so, by all means go for it. But if your goal is a comfortable retirement at a normal retirement age, it might not be necessary.

So, how much should you contribute to your 401(k)?

It's a good idea (at a bare minimum) to contribute enough money to your 401(k) to take full advantage of your employer's matching contributions. And most financial planners (myself included) advise that the typical American ought to aim to set aside 10% of their salary for retirement, not including the employer match. So, keep these general guidelines in mind, but also be aware that the 401(k) contribution limit is rather high and it may not be practical or necessary for you to try to put every dollar you can into your 401(k).