You Might Not Want to Max Out Your 401(k) Right Away

Contributing to a 401(k) plan is an excellent method for saving for retirement. There are many benefits to having a 401(k) plan, and you often hear that you are supposed to max out your account. Yes, that is true, but not so fast. Consider these four reasons why you may not want to max out your 401(k) right away.

1. Employer Matching Contributions

According to Vanguard, approximately 96% of 401(k) plans offer the option for a matching employee contribution from your employer. Because there is an employee contribution limit for the 401(k), $23,000 in 2024, if you reach that limit on your own too quickly, you have to stop making contributions. If your employer matches your contributions each payday, as opposed to a lump sum at the end of the year, you could miss out on free money. This may occur because your employer will only match when you contribute. If you happen to be over age 50, you can contribute another $7,500.

2. Financial Distress

Then, if you happen to live in a high-cost area or have significant debt that you are trying to pay off, contributing more than you can afford to max out your retirement could leave you in a difficult financial situation. A financial professional can help you figure out a comfortable contribution schedule, allowing you to use the entire year to max out your 401(k) contributions without creating financial worry or, worse, accumulating debt to stay afloat.

3. Alternative Tax-Advantaged Accounts

Some people contribute all their available money into their 401(k) to max it out. However, doing so may not be beneficial. Instead, you may consider contributing to other tax-advantaged options, such as an IRA. An IRA allows more cash distribution options than a 401(k). With an IRA, you can take a distribution at any time, however if you are under age 59 1/2, you will be subject to a 10% penalty in addition to current income tax.

4. Limited Investment Options

A significant reason you don’t want to put too much money into your 401(k) account too fast without weighing your options, is that your investment options could be limited. Studies have found that the typical 401(k) plan offers a variety of investment options, generally mutual funds or target date funds. In other retirement accounts like an IRA, you can invest in almost any asset available at the brokerage firm of your choice. You can invest in mutual funds, target date funds, and shares of stock in individual companies. This gives you many more options for investment opportunities than the 15-30 offered by a 401(k).

Consider Consulting Your Financial Professional

A 401(k) plan can be complicated. Nuances and risks are involved with all forms of investments, many of which you may not be aware of. For this reason, it is prudent to consider seeking guidance from a financial professional who can help you recognize available options and determine how each decision could impact your financial strategies and goals.

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risks including possible loss of principal.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Sources:

401(k) Planning: How Maxing out your 401(k) too early Could Cost You (linkedin.com)

3 Reasons Not to Max Out a 401(k) (fool.com)

Should You Max Out Your 401(k) at the Beginning of the Year? | Human Interest

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