Max out your 401(k)! You’ve probably heard this advice before. But does it make sense for everyone? The truth is, maxing out 401(k) contributions isn’t the right choice for everyone. Let’s break down when it makes sense to max out your 401(k) and when you should not.
What Does Maxing Out Your 401(k) Mean?
Maxing out your 401(k) means contributing the maximum amount allowed by the Internal Revenue Service (IRS). In 2025, the maximum 401(k) contribution limit is $23,500, with additional catch-up contributions for those 50 years and older (an extra $7,500) and those between ages 60 and 63 ($11,250).
When to Max Out Your 401(k)
Maxing out your 401(k) isn’t the right move for everyone, but in certain situations, it can boost your retirement savings. Here’s when it makes the most sense:
You’re Debt-Free
No matter how pumped you are about securing your retirement, you should wait until you’re completely debt-free to max out your 401(k). Without monthly debt payments like credit cards, student loans, or mortgages, you’ll have more free cash that you can channel toward your retirement fund.
You’re Running Behind on Your Retirement Savings
If you’re in your 50s or 60s and your retirement savings aren’t where they should be, maxing out your 401(k) can help you catch up. Provided that you’re debt-free, own a fully paid house, and have an emergency fund, stash as much money in your retirement plans as you can.
You Have a Fully Funded Emergency Fund
Life happens, and some things are out of our control. That’s why having at least three to six months worth of emergency savings ensures that you have something to tap into in case of an unexpected expense. Once you have a fully funded emergency fund, maxing out your 401(k) and other retirement plans is a smart move.
You’re a High-Income Earner
If you’re earning more than your living expenses, you can let the extra income work harder for you in retirement accounts like 401(K). You should also take advantage of a traditional IRA in addition to your 401(k) because you may not be eligible for a Roth IRA due to the IRS income limits on those accounts.
However, remember that in a traditional IRA, your contributions grow tax-deferred, meaning you’ll pay taxes on withdrawals. But there’s a way to move that money into a Roth IRA called a backdoor Roth IRA, which is entirely legal. Just know that you’ll pay taxes on your contributions when you move them over.
When Not to Max Out Your 401(k)
While maxing out your 401(k) lets you hit your retirement savings goal faster, it’s not always the best financial move. Here’s when it doesn’t make sense to max out your 401(k) contributions.
You’re Still Getting Out of Debt
Your income is the most powerful wealth-building tool. So, carrying high-interest debt like credit card debt, student loans, or personal loans can drag you down when trying to achieve your financial goals. That’s why you should prioritize getting out of debt first before you even think of investing for your future. You can use the debt snowball method to pay off your debt from the smallest to the largest.
You Don’t Have an Emergency Fund
If you don’t have three to six months worth of living expenses in an emergency fund, maxing your 401(k) isn’t ideal. Keep in mind that tapping into your 401(k) in case of an emergency before age 59 ½ will result in early withdrawal penalties and any taxes you owe. You’re better off building an emergency fund before maxing out your retirement plan.
You Haven’t Diversified Your Retirement Accounts
If all your retirement savings are going to a 401(k), you could be missing out on other tax-advantaged accounts like a Roth IRA, which offers tax-free growth and tax-free withdrawals in retirement. Diversifying your retirement accounts offers a balance between pre-tax and after-tax dollars.
Your 401(k) Has Higher Fees or Limited Investment Options
Not all 401(k)s are created equal. If your plan has higher fees or limited investment options, it may only make sense to only contribute enough to a 401(k) to get the company match and channel the rest of your savings to other retirement accounts like a Roth IRA.
You Expect to Be in a Higher Tax Bracket in Retirement
If you anticipate your income will increase in retirement, then maxing out your 401(k) may not be a good idea. This could put you in a higher tax bracket and could increase your future tax burden. A retirement account like a Roth 401(k) or Roth IRA that grows tax-free may be a good option instead.
