A 401(m) is an employer-provided retirement account y'all tin contribute to with pre-tax dollars.

In 2022, y'all can contribute a maximum of $20,500 (up from $xix,500 in 2021) to your 401(yard) if you are younger than fifty. If you lot're 50 or older, you lot get eligible to make boosted catch-up contributions valued at $6,500. That ways you can contribute a total of $27,000 (up from $26,000 in 2021). These limits can change annually, and they do not include whatsoever matching funds your employer provides.

If you lot have enough money to exercise then, you volition need to decide if you should max out your 401(thou) or if it would be smarter to do other things with your money. There are pros and cons to both options.

When you should max out your 401(k)

Maxing out your 401(k) tin exist a smart fiscal move under certain circumstances. You should consider contributing the maximum to this account if the following apply to yous:

  • You are financially stable: It makes piffling sense to put thousands of dollars into a 401(grand) if you're struggling to accomplish basic fiscal tasks such as paying your bills on time or keeping a roof over your head and nutrient on the table.
  • You don't accept loftier-interest debt: Your 401(k) returns will rarely, if ever, exceed the interest rate you'd pay on credit cards or payday loans. If y'all have debt with an interest rate of around 10% or college, you should by and large contribute just enough money to your 401(g) to earn your maximum employer friction match. Then focus on paying down your debt with your extra money.
  • Yous accept an emergency fund:You need liquid greenbacks attainable for emergencies to avert catastrophe up in debt when yous face unexpected expenses. You exercise not want to be forced to withdraw funds from a 401(m) to cover emergencies, peculiarly since you could face penalties for withdrawing funds before age 59 1/2 or you could be forced to sell 401(m) investments at an inopportune time. Save up at to the lowest degree a small emergency fund before contributing anything to your 401(k) and then contribute enough to earn the maximum employer match. After that, divide your spare greenbacks betwixt 401(k) contributions and building an emergency fund with plenty money to encompass three to six months of living expenses.
  • You have considered other types of tax-advantaged accounts: Rather than devotingall your retirement money to maxing out your 401(k), y'all should consider whether some of your funds should get into a traditional or Roth IRA or a health savings account. These accounts tin can provide different taxation benefits, and, in some cases, more flexibility in what assets yous invest in.

If you lot have the coin to max out your 401(k) and have considered the opportunity costs of using your funds for this instead of other financial goals, and then spending the money to maximize this tax-advantaged retirement account can brand sense.

You'll benefit from the ease of contributing directly via your paycheck and from the tax breaks a 401(k) provides. And, having most or all of your retirement money in 1 place tin can make it easier to monitor your portfolio and make certain you maintain the proper asset allocation.

When you lot shouldn't max out your 401(m)

There are too circumstances where you should not max out your 401(k). You lot likely shouldn't contribute the maximum to this business relationship in the following situations:

  • Y'all're struggling to make ends meet: If you're living paycheck to paycheck or can't comprehend your bills, you need to address other pressing financial priorities first.
  • You lot could do good from allocating some of your money to other retirement investment accounts: If you are eligible for a health savings account, for instance, you may wish to put some coin into this type of account since it provides even amend tax advantages than the 401(k). Or, if you would prefer to have some money out tax-free in retirement, putting coin into a Roth IRA could be a meliorate pick.
  • You lot aren't prepared for financial emergencies: Prioritizing an emergency fund is likely more important than maxing out your 401(k). Otherwise, surprise costs could get out you lot in debt.
  • Your employer's 401(k) program isn't very expert: If your plan charges high administrative fees or has a limited puddle of investments that come with high fees, yous may wish to invest just enough in your 401(grand) to earn the maximum employer match and and so put the rest of your retirement money elsewhere.

Fifty-fifty when you do not want to contribute the maximum to your 401(k), you should not pass up an employer lucifer. This is guaranteed gratis money that you lot cannot obtain in nearly other circumstances.

Where to invest later maxing out your 401(thou)

If you have maxed out your 401(g), there are other types of tax-advantaged accounts yous may be interested in investing in. These include the following:

  • Traditional or Roth IRAs:These accounts take a lower contribution limit than a 401(1000). There are income limits for making deductible IRA contributions or for investing in a Roth IRA, just they provide more flexibility in what you invest in. As well, Roth IRAs allow you to invest with after-tax dollars and take revenue enhancement-complimentary withdrawals, which could provide more tax savings than a 401(k) if you expect your tax rate to exist higher in retirement.
  • Wellness savings accounts: These are open just to individuals with qualifying high-deductible health insurance plans. You lot contribute with pre-tax funds, coin grows taxation-free, and withdrawals for qualifying health expenditures are also tax-free. These are the only accounts offering a triple tax benefit. Seniors tin can also make penalty-free withdrawals for any reason after reaching historic period 65, just they would be taxed on those withdrawals at their ordinary tax rate.

Yous can invest in these accounts subsequently maxing out your 401(1000) if you lot are eligible for them. You lot tin too choose to split your contributions between your 401(k) and these other types of accounts later putting enough into your 401(k) to get the maximum employer match -- fifty-fifty if you oasis't still put the full $20,500 or $27,000 into your 401(grand) account.