Is Maxing out Your 401(k) the Best Option in 2024?

You’ll often hear that retirement savings are critical to living comfortably in your golden years. A median income earner’s Social Security benefits only replace roughly 40% of their pre-retirement earnings. Most retirees require around double that amount of money to fulfill their obligations while maintaining a comfortable level of life.

When saving for retirement, you now have several options to select from. One of your options may include a 401(k). Financing a 401(k) plan may result in an employer match, which is essentially free retirement money. Hence, if your employer plan offers a match, it pays to contribute enough to collect it in full. This may motivate you to contribute as much as possible to your employer’s 401(k).

That doesn’t mean you should contribute to your 401(k) this year. When you’ve claimed your workplace match, depositing the remaining funds into a separate savings plan can be wiser.

401(k)s are not without problems.

Besides matching options, one advantage of 401(k) plans is that they have larger contribution limits than IRAs. Yet, you should know that 401(k) programs may have severely limited investing options.

Unlike an IRA, you cannot buy individual equities in a 401(k). Instead, you’re usually confined to a few distinct funds, ranging from target date funds to mutual funds to index funds. Because your investment options in a 401(k) are limited, you may discover that your existing plan does not allow you to build your desired portfolio. Also, you may discover that the costs you are forced to pay are higher than you would prefer. An IRA might alleviate both problems, making it a superior option.

You may also save for retirement in a Roth account to take tax-free withdrawals later in life. But, not all 401(k) plans have a Roth option. So that’s another reason not to exhaust your employer’s plan this year.

Make use of many alternatives.

A better option may be to save for retirement in many accounts. Thus, before you max out your 401(k), ask yourself if it suits your needs. If not, you might always consider putting in just enough money to get your full company match after the match is met and consider alternative choices for the rest of your retirement plan contributions.

In addition to an IRA, you may want to consider a health savings account (HSA) or even a taxable brokerage account for future savings. HSAs provide several tax advantages (and may be used for non-healthcare costs without penalty until you reach the age of 65), so that alone is a compelling incentive to fund one.

While a conventional brokerage account does not provide tax benefits, it does allow you to invest as much as you want and withdraw as much as you want. Overall, it pays to investigate your options to find the best combination.