Blog: Should I Max Out My 401k?

Should I max out my 401(k)? This is a common question. After all, when it comes to retirement savings, isn’t more always better? In this blog, we will answer the common question about whether you should max out your 401(k), and things to consider before doing so.

Before we answer the main question, let’s discuss what maxing out a 401(k) means. The IRS imposes limits on what employees can defer out of their paycheck into a 401(k) account. The employer may also match, or do a flat contribution, into the 401(k) account. The maximum amount the employee is allowed to defer is $19,500 for people under age 50 and $26,000 for those age 50 and older. Employer contributions into the employee 401(k) do not count against this limit. There is an overall 401(k) limit of $58,000 into a 401(k) for 2021, so if your employer happens to put a huge contribution into your 401(k), that may limit your ability to max out at $19,500, but the majority of employers won’t be putting that major of a contribution, so we will use $19,500 as the maximum in this blog.

As we have discussed in other blogs, many employers are allowing employees to have access to a Roth 401(k) and a traditional 401(k), meaning you can choose which tax treatment you want for your money. You may be able to choose both types of tax treatment for your 401(k) contribution, but the $19,500 for under age 50 is for all employee contributions combined. So you could put some money into the traditional 401(k) and some into Roth, as long as the combined total doesn’t exceed the IRS maximum of $19,500 ($26,000 age 50 and older). Remember, all employer contributions are traditional.

So with that background, let’s talk about the main question: should you max out that $19,500 (or $26,000 for age 50 and older) employee contribution? To answer that, I will ask you some questions.

Question #1: Do you have any high interest debt, like credit card debt or personal loans?

If you answered yes to this, you may want to consider paying off this debt before maxing your 401(k) contribution. You don’t want to pay more interest than necessary on high-interest debt. If you can, put the minimum in your 401(k) to receive the company match, and then funnel the remainder of your usable budget towards paying off high-interest debt. Once that’s paid off, all of those funds are freed up to do other things, plus, it feels pretty great to be debt-free!

Question #2: Do you have an emergency fund of 3-6 months of living expenses set aside in a savings account? 

If the answer to that question is no, then it might be a good idea to set your retirement savings to get your employer match, and then focus on building up your emergency savings. Retirement savings are extremely important of course. But an emergency could happen anytime, and it’s important to be financially prepared if it does. So ensuring you’re prepared to pay your bills and take care of yourself and your family for 3-6 months in the event of a job loss, unexpected expense, etc, should generally take priority over maxing out the 401(k).

To find out more questions to ask yourself, visit our max-out 401(k) blog.

About Alvin Carlos, CFA, CFP®

Alvin Carlos, CFA, CFP® is passionate about helping middle class professionals make smarter financial decisions. He is the CEO of District Capital Management, a financial planning and investment management firm for the everyday people. Alvin is a CERTIFIED FINANCIAL PLANNER™ practitioner and has a Masters degree in International Relations from SAIS-Johns Hopkins. In his spare time, Alvin enjoys swing dancing and Ultimate Frisbee. He also volunteers for Catholic Charities’ new Financial Stability Network, which helps low-income folks with their finances.

View all posts by Alvin Carlos, CFA, CFP®