Blog
Should I Max Out My 401(k)?
Summary
Maxing out means contributing up to the IRS limit. It’s great if you can do it, but building an emergency fund and paying high-interest debt often come first.
Maxing out your 401(k) means contributing up to the IRS limit for the year. For many people that’s a lot of money. Doing it is great for retirement, but it’s not always the first thing you should do.
If you don’t have an emergency fund, or you’re carrying high-interest debt, putting every spare dollar into the 401(k) can leave you exposed. A common approach is to get the full employer match first, then build a solid emergency fund and pay off expensive debt. After that, increasing 401(k) contributions (or adding an IRA) is a strong next step.
When maxing out makes sense
If you’re already saving for emergencies, you’re not in high-interest debt, and you have room in your budget, pushing toward the max is a powerful way to save for retirement. The tax break and any match make it very efficient. Use a 401(k) Retirement Calculator to see how max contributions could grow over time.
Definitions
- 401(k) deferral limit
- The maximum amount you can contribute from your pay to a 401(k) in a year; the IRS sets it and it changes over time.
FAQ
What is the 401(k) contribution limit?
The IRS sets an annual limit for employee contributions (e.g. around $23,000 for 2024, with an extra catch-up for people 50 and over). The limit is updated for inflation.
Should I max my 401(k) before saving in an IRA?
Many people get the full 401(k) match first, then consider an IRA for more flexibility and sometimes better investment options, then add more to the 401(k). There’s no single right order; it depends on your plan and goals.