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Should I max out my 401K?

Most personal finance experts recommend contributing to the 401K up to the match.  Even without a match, the plan provides a fairly easy way to automate your savings while lowering your taxes.  With open enrollment approaching at my job, I’m faced with the question: Should I max out my 401K? When I first got this position, I set a goal to contribute $16,500, the maximum possible.  Now, that figure seems a bit intimidating. Spread over 6 months, $16,500 will be $2,750 per month, or more than a majority of my monthly paycheck.

Why I should NOT max out my 401K:

  • $16,500 is a lot of money to be tying up – I may very well need money for a new car, graduate school tuition, big moving expenses, etc. in the next 1-5 years
  • The next open enrollment period is January 2011, so basically once I set my contributions, I’m locked in. I can’t decide in September that I’d like to scale back.
  • I don’t have an employer match
  • I can access lower expense ratios in my Rollover IRA / Roth IRAs

Why I SHOULD max out my 401K:

  • There is no better way of enforced savings. Truly. 401K contributions come out before Federal Income tax, for goodness sakes. You know how Uncle Sam always gets his money where it’s due? Well, maybe it’s time for Auntie Retirement to get hers too.
  • Lower taxes. Right now, about 28% of my paycheck is gone before the money even hit my checking account. Maxing out my 401K will dramatically reduce my Federal income tax.
  • I will be very thankful that I maxed out 401K if I go back to graduate school in a few years. An MBA comes with big loans, not tax-deferred retirement vehicles.
  • On a related note, the next 5 years will likely be filled with a lot of moving pieces, both personally and professionally. Hopefully I will be earning a higher salary in 5 years, but I will also have more personal obligations (some possible big expenses that come to mind are: wedding/honeymoon, grad school, new car, cross-country relocation, etc). So it’s probably wise to save as much as I can right now.
  • I didn’t have a 401K for 2008. So really I’m only saving $8,250 a year if you spread the contribution over 2008 and 2010.
  • When I roll over my contributions, I can invest the money in a much wider variety of funds. But I have to have the money in a 401K first before I can roll anything over.

So.. there you have it. I have until June 30th to make a decision. A reasonable suggestion might be to contribute $10,000 to the 401K, but I admit I really like the sound of maxing out 401K!  I have been saving for the past couple of month in an savings account that I dubbed the “cash-flow subsidy account” to supplement my paycheck for the rest of the year.  I have enough cash savings so that even if my car dies tomorrow (knock on wood!), I can buy a new economy car or a 2nd hand Honda and my emergency fund will still be in fairly decent shape.

What do you think? Should I max out my 401K or not?

  • DDe - I've maxed out the last five years. This is the first that I will probably not because I'm focused on debt repayment. I think its one of the easiest and best ways to save. If you can truly swing it , I vote YES! ReplyCancel

  • Jen - Hell yes! I believe that you are in your 20's? Max it girl. The money you put in to your 401 in your twenties will have the most power to grow. You will be so happy you did this when you retire. The tax savings is also a huge help when you have a good income & no deductions. If you can't get the full 16,500 in this year, don't sweat it, just do the best that you can. But max that puppy out next year. It's even better if you get a match (I don't & never have). I'm 36 & was unfortunately not able to start my 401K until 27 due to my doing contract work, but I now have nearly 150,000 in my 401 K & that's with agrressive mix in a down economy. I look at many of my friends who are in their mid 40's & have almost nothing in retirment accts, but are driving BMWs. I wonder how they sleep at night. MAX IT OUT GIRLIE! ReplyCancel

  • Pop - Are you sure you can't change contributions once you're enrolled? That would be very uncommon. Most employers only give you one shot to sign up for health insurance or maybe even the 401k plan, but contributions are adjustable during the year. But to the question, I'd say contribute as much as you can after maxing your Roth. If you don't make it to the max, don't worry about it. Saving 20% of income is a lot and spending money on your early life is just as important as spending on your old future self. ReplyCancel

  • onegirl - If you have enough money for your future plans now (new car, graduate school tuition, big moving expenses), max out your 401k. Are you still going to have money for a Roth as well? I have never maxed out my 401k because I am scared I'm going to need the money (even though so far I haven't), and I have always saved for retirement, so I feel ok with not maxing it out. I do need to do fun things now, so i don't want ALL of my money tied into retirement funds.

    Maybe you should start a little smaller, and see how things go. Especially since you can't change it. I think that's kind of crazy that you can't change it for a year. My company lets you change your contributions at any time. I increased it once and felt too stretched, so I pared back. ReplyCancel

  • eric1985 - If it were me, I would not focus on maxing out my 401(k) as a goal. I would contribute heavily. I personally put 12% of my income into 401(k), Roth, and the employee stock program. If you put over half of your paycheck into retirement savings, you are probably neglecting shorter term savings. I assume, at some point, you would consider buying a home. It is hard to save for if all of your money is in a 401(k). At least you can pull out Roth earnings without penalty for a home, so I would max that out. But the 401(k) max out might go to better use elsewhere.

    It all depends on your goals, but that is what I would do. ReplyCancel

  • SP - I liked the sound of maxing mine out, but I decided that a little less than the max made sense for me (cash is still recovering from wedding/honeymoon) so I could boost my cash just a little more. Somehow it feels like anything less than the max is "failing"! Weird, huh?

    I think you could definitely do it if you want – but you would be sacrificing cash savings a little bit, and you probably couldn't do it every year for the next 5 years with your cash needs.

    It is too bad you can't adjust throughout the year, I probably have already changed mine 5 times this year! ReplyCancel

    • WellHeeled - I have open enrollment twice a year, so I can change my contribution levels twice next year (Jan 2011 and July 2011), but for the rest of 2010 will be with whatever contribution I designate right now. ReplyCancel

      • SP - Oh i see – twice a year is better than once a year. Let us know what you decide! ReplyCancel

      • Jason - I can change mines at anytime…my max now is 25% and im putting the max.


  • amberto - i think you're doing the right thing by looking at all the possibilites. i'd do it if i could do it REASONABLY. if you're going to be scraping by each week and it's REALLY going to hurt, i wouldn't max it. but if it's only going to hurt a little – go for it! ReplyCancel

  • Meg - I made the decision to max out mine this year for the first time, and I’m so glad I did! It is a lot of money to be tying up, but it makes me feel so good about my finances to know I’m maxing out that account. No matter what else is going on in my financial life, I know I’m doing that one big thing right. Plus I don’t know how many years I’ll be working for a company where I have the option to contribute (or in a good enough financial position to contribute), so I’d hate to not max it out during the potentially few years I have the chance.

    That said, I’d of course make sure you have some solid emergency savings first, particularly if you’re considering expensive short/mid term goals like grad school, a wedding, a car etc. ReplyCancel

  • Laura - This is such a relevant post for me – I am going to have my student loans TOTALLY repaid this summer (!!!), and in May, I took a new job with a significantly higher salary than what I've earned in the past.

    My plan: I'm turning over everything I had allocated to student loan payments over to savings/401K, and also saving extra from the increased salary – that accounts for about 25% of my pre-tax income. For my 401K, my company matches… but it's not a set match, it's determined every year (mid-year). Last year they aimed to match up to 10% of salary with a dollar-for-dollar match, which is awesome, so I was aiming to put 10% of my salary into my 401k. Is 10% what you mean by maxing out? Or is there another max I should be considering? ReplyCancel

    • onegirl - When she says 'max it out', she is talking about contributing the Federal limit, or $16,500/year. ReplyCancel

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  • Money Reasons - If I were you, I probably wouldn't, I would definitely contribute some though! Maybe 15%, and then max it out next year?

    If you have other funding for emergencies, then put it all in and let it ride. ReplyCancel

    • WellHeeled - I have around $30K in cash right now – but that's 90%+ of my cash savings – it's my Do Not Touch Until Emergency / Grad School / Need a New Car fund. ReplyCancel

  • Samurai - Max for life! I'm surprised you can't adjust your contributions throughout the year. Can you double check that? I can literally change my 401K contribution every month.

    I love living on less money and knowing it's get built elsewhere. Do it! Max! ReplyCancel

  • Sense - once it's in there, it's in there for good…if you feel like you'll need some of the money for something else sometime soon, don't do the max–but set aside the difference in your paycheck and see how it feels. If it's comfortable and do-able, save the money to live off of and change it to the max in Jan 2011. Even if it isn't comfortable, $10K is nothing to sneeze at! ReplyCancel

    • WellHeeled - I think maybe your idea might be the best… try to contribute as much as I can (I'm thinking $12,000), then make a plan to max it out for 2011. ReplyCancel

  • paranoidasteroid - It's hard to give advice since I'm notsure how much cash you have in savings, how secure your job is, etc.

    If you have a decent amount in savings (6 months + of expenses) and your job is reasonably secure, I'd go for it. I read an article a long time ago that said if you maxed out retirement accounts just the year you were 26, you would have a million dollars at 65. I think the rate of return was set pretty high, but that always stuck with me, especially since I know I'll contribute more than just for one year!

    And just think – you only have to make it through 6 months of budget strain before 2011 begins and you can loosen up! ReplyCancel

  • Balancing Retirement with Short-Term Goals - […] considering the should I max out my 401K? question (thank you for all your helpful insights), I’ve decided to compromise, and contribute […]ReplyCancel

  • 401k Limit Dude - Max it out! It's the way to go. Great feeling of accomplishment. ReplyCancel


  • 56 and counting - I have been maxing out for several years now. Over 50, house paid for, kids grown and out, emergency fund in liquid savings, cars paid for. I have the money in a 401K money market (will not loose money, but 3 or 4% is great for piece of mind). Map out a plan that works for your family and stick to it!ReplyCancel

  • Mmm - The main idea is to tie up money for retirement! Do it!
    If you need money for other things, then live further below your means and save for them at the expense of other choices. :) ReplyCancel

  • J rp - I have a company match & company profit sharing, so it's a bit different for me, but you really do want to have a significant amount of liquid cash in a savings, Roth IRA, or something you can access if you need to without taking on a loan or incurring big penalties. Thousands and thousands of americans who follow the "max out your 401k account" advice end up being disappointed when something comes up (as it always eventually does–especially if you get married and have a family!!!) and they need a down payment or want cash for another reason. I'm a big fan of putting in as much in your 401k as you can to take advantage of company matches and incentives, but if your company doesn't offer that or after you reach the max your company matches, then go with a Roth IRA where you can tap into that money if needed in the future. Once you max out the Roth IRA, then you can put some of your remaining $$ into the 401k, but some of it should go to traditional savings, an emergency fund, paying down/off any higher interest loans you might have. I thought maxing out the 401k was the way to go for the first 5 – 10 years I worked, and then I noticed a pattern: Most people who do this end up having more than they need in their 401k, and then get smacked in the mouth when something unexpected happens and they need cash, or when something expected happens (they need a new car, are getting married and having kids, etc) and they end up with several reasons to have cash. I've seen people come up with great ideas for their own small businesses that could turn them into millionaires, but they need $25K – $50K in startup costs, have all their money in their 401k, and they can't save the $25K – $50K because they refuse to decrease their 401k contributions…. then 5 years later you see a new startup company doing what they wanted to do and making millions of dollars. ReplyCancel

  • 401(K) Benefits - Among the many 401(k) benefits, a major advantage is that money you’ve deposited is absolutely safe from any sort of bankruptcy problems or debt collectors. Even if the firm you are employed in files for insolvency, you need not panic as your contribution is safe. This is because the amount is kept in trust by a different entity altogether and remains untouched.ReplyCancel

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