Should I max out my 401(k)? Strategic contribution tips

Retirement might feel like a lifetime away, and at the same time, 56% of Americans feel like they’re falling behind on their retirement savings. Balancing your current financial needs while saving for a distant future makes deciding if you should max out your 401(k) difficult. Especially if you’re just starting your career.

The simple answer is that most folks shouldn’t max out their 401(k) contributions. Most can benefit from contributing some of their discretionary income to an IRA. If you can’t afford to max out your 401(k) — the 2024 contribution limit is $23,000 — that doesn’t mean you shouldn’t invest at all for your future. 

A 401(k) is still an extremely valuable asset to maintain, and you should contribute if your employer offers it. 

Learn more about retirement account options and how to settle on a regular contribution below. 

Max 401(k) contributions

Maxing out your 401(k) means contributing as much as legally possible to your account each year. The IRS-imposed contribution limit is $23,000 in 2024 and changes year-to-year to account for the cost of living. People over age 50 can also make $7,500 catch-up contributions for a maximum annual contribution limit of $30,500. 

The reality is that most Americans can’t afford to cut $23,000 from their income, so maxing out a 401(k) isn’t feasible. 

The typical American makes just $40,480 a year. If they follow the popular  50/30/20 budgeting method — which encourages saving 20% toward retirement and other savings — they’d need at least a $115,000 salary to max their 401(k). 

That’s a 184% salary increase, which can be intimidating, but it doesn’t mean you can’t stash away enough money to enjoy a well-earned retirement. 

Benefits to maxing out your contributions

The biggest benefit of large, regular contributions to a 401(k) is obvious — your account balance grows a lot quicker. But that’s not all there is to gain. Here are other benefits to consider:

• Increase your account growth with larger contributions and compound returns over time.
• Max out employer-match benefits.
• Reduce your taxable income with tax deductions for your contributions. 

The tax advantages are especially great with 401(k)s because of how high the contribution limit is. If you can afford to max out your contribution today, you’re probably making a pretty penny. Chances are that you’ll earn less in retirement and your final tax rate would be lower, reducing the taxes you have to pay on withdrawals.  

If you can afford it, maxing your 401(k) contributions is a good idea for:

• High earners that can afford the $23,000+ contribution.
• Late starters who want a large balance to earn compounding returns ASAP.
• Investors without any debt eating into their income.

Concerns with maxing out your contributions

Maintaining your current lifestyle and financial stability should be your No. 1 concern. If you want to max out your 401(k), make sure you’ll still be able to afford to:

• Keep an emergency fund 
• Pay off your debt
• Save for short-term goals

If you can’t keep up with these other goals and your 401(k) contributions, you simply can’t afford to max out your account. And that’s totally okay — there are other strategies to save for retirement. 

1. Prioritize these nonretirement finances

Retirement is a huge investment, and the sooner you start saving, the better. But before you retire, you may be thinking about moving to advance your career, buying a home and building equity, throwing a wedding party, and starting a family. 

And we haven’t even started on the less fun but also very important goals like maintaining an emergency fund and paying down debt. 

These needs will likely pop up well before you’re ready to retire. So, when deciding how much of your paycheck to send to retirement accounts, build a timeline of your goals to help you prioritize your savings strategy. 

Before contributing to retirement accounts, consider the costs of:

• Starting an emergency fund: Experts recommend saving three to six months’ worth of essential expenses for emergencies, such as a layoff. If that sounds like too much to sit on, consider that 33.8% of unemployed Americans took 15 weeks or longer to find a job in February 2024. 
• Reducing your debt: Americans carried an average of $104,215 in cumulative debt in 2023, and mortgages and student loans account for the bulk of it. 
• Buying a home: The median sales price of a single-family home was $379,100 in February 2024, and first-time homebuyers put an average of 8% down.
• Getting married: The average wedding cost was $30,119 in 2023, but there are plenty of ways to cut expenses. 
• Raising a family: Children are expensive, and research estimates the full cost of raising a single child to adulthood ranges from $233,610 to $310,605.

2. Work with your current budget

Your living expenses don’t end with rent, groceries, and retirement contributions, and we don’t recommend sacrificing everything else to max your 401(k). All work and no play isn’t the answer.

You need an accurate and updated budget to determine the best 401(k) contribution for you. There are a million and one budgeting tools and strategies available to explore, but you can keep it simple with these steps:

1. Review your bank statements from the last three to six months to identify  your typical spending patterns. 
2. Sort expenses into needs, wants, and savings goals.
3. Identify the typical costs associated with each item or category. 
4. Adjust your budget, considering how much you usually spend and where you want to cut back. The 50/30/20 rule is a good place to start. 
5. Change your spending habits to align with your new budget. Keep track month-over-month to see how you’re doing and adjust your budget as needed.

Your final budget will help you determine how much of your money goes to all of your savings goals each month (aiming for 20%), then break that down further to find a realistic 401(k) contribution. 

‍3. Max out employer-match benefits

You don’t necessarily have to max your 401(k) contributions, but if you receive employer-matching benefits and can afford it, we recommend taking full advantage of the perk. 

The reason is simple—it’s free money and part of your employee pay that you don’t want to leave behind. In the long term, compound earnings can more than double the total employer contributions without ever taking a cent from your own pocket. 

Employers typically match up to a certain percentage of your salary, so figure out what that is and if you can afford to contribute that much each year. The median value of an employer match in Vanguard plans was 4% of employee pay in 2023, though percentages and even calculations for matching benefits vary. 

Connect with HR or your plan administrator to learn more about your employer-match benefits and begin contributing. 

4. Tier your tax advantages

A 401(k) is just part of your overall tax strategy, and it’s important to understand what other tax-advantaged accounts are available and how they fold into your plans. 

• Traditional 401(k)s accept pre-tax contributions that reduce your taxable income and defer tax payments until withdrawals in retirement. 
• Roth 401(k)s accept after-tax contributions, which is great if you expect your income and tax rate to increase by retirement. Returns grow tax-free, and you can even tap into your contribution balance without triggering early withdrawal penalties. 
• Traditional IRAs are individual accounts that also use pre-tax income, which results in a tax deduction (depending on your income). Since they’re individually owned, you can continue contributions regardless of your employment and enjoy more investment options. 
• Roth IRAs have the same flexibility as traditional IRAs, but they accept after-tax contributions for tax-free growth and withdrawals. However, the income limits might disqualify high-earners from contributing to a Roth IRA. 

You can have multiple 401(k)s and IRAs, as well as mix-and-match traditional and Roth accounts to optimize your tax strategy, diversify your investments, and manage your risk.

If you plan to really grow your career and income, Roth accounts mean less tax liability when your increased income places you in a higher tax bracket. 

But, traditional accounts might offer more immediate tax benefits and are best for investors who expect their income and tax bracket will decrease by retirement.  

5. Find professional support

Nailing your investment ratio and determining your contributions for each account is tricky. Luckily, more resources are available than ever before, and they’re getting better every day.

You can also DIY your investments with a little due diligence and support. There are plenty of free and expert resources across the web to help you, as well as paid options like robo-advisors and financial apps to help you strategize. 

Real, human advisors aren’t going away any time soon, either. You can work with a broker to run your investments or chat with a CFP for a more holistic financial strategy. 

Learn the difference between types of financial advisors and decide what’s right for you. 

What happens if you overcontribute to your 401(k)?

This won’t be a problem for most folks, but it’s possible. If you’ve exceeded your annual contribution limits, you’ll want to contact the plan administrator and withdraw the excess deferral and any returns earned on the contribution. 

You’ll be charged income taxes on any earnings from the excess contribution, as well as a 10% early withdrawal penalty if you’re younger than 59½ years old.

You might also be able to rollover the 401(k) funds into an IRA or other tax-advantaged account and avoid taxes and fees.

If you leave the excess funds in the account, the IRS will tax the amount twice – first in the year you contributed it, and again when you withdraw it. 

The Playbook take: Don’t stress about maxing out your 401(k)

Your 401(k) is an extremely valuable retirement planning tool that offers several tax advantages, perks like employer-match benefits, and a relatively high contribution limit. 

You should absolutely take advantage of your 401(k) and at least try to max out your employer match, but most people can’t afford to contribute $23,000 a year to one financial goal that’s 25 or more years off. 

And there’s nothing wrong with that. In fact, focusing on your 401(k) might mean you’re missing out on great tax advantages from diversifying your investments with Roth accounts and IRAs. 

Try Playbook to see how your investments work together and get advice to adjust your priorities and maximize your tax advantages.

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