The 401(k) is a powerful investing tool, and millions of Americans could benefit by contributing more to this type of account.
However, it’s possible to have too much of a good thing. Maxing out your 401(k) could seem like a smart idea in theory, but in some cases, it could actually hurt your long-term savings. While everyone’s situation is different, there’s a big downside to consider before maxing out your 401(k).
You could rob yourself of other opportunities
There are plenty of advantages to investing in a 401(k). They often offer an employer match, for example, which can instantly double your savings. The 401(k) also has a much higher contribution limit than other types of accounts — with a cap of $23,500 in 2025, compared with $7,000 per year for IRAs.
However, if you’re investing the full $23,500 per year into your 401(k), that could make it harder to contribute to other accounts as well, which could put your retirement at a disadvantage.
Image source: Getty Images.
In general, 401(k)s don’t offer as many investing options as IRAs. You’ll often have a handful of mutual funds to choose from, and that might be enough for some people. But if you’re looking to really customize your portfolio and earn as much as possible, it can be hard to do that with a 401(k).
Also, many 401(k)s may charge higher fees than IRAs. While the difference may only be a fraction of a percentage point, that could cost you thousands or even tens of thousands of dollars over decades.
Finally, investing in a pre-tax account could sometimes come back to bite you in retirement. Your initial contributions are tax deductible with a pre-tax account, but you’ll pay income taxes on your withdrawals. The opposite is true with a Roth account. You’ll pay taxes upfront, and your withdrawals will be tax-free.
There’s nothing necessarily wrong with pre-tax accounts, and they can provide immediate tax advantages. However, if you’re investing all of your savings in this type of plan, you can expect some hefty tax bills in retirement.
Splitting the difference
There’s no right or wrong way to save for retirement, as it will depend on your personal preferences. But some people may find it beneficial to save enough in a 401(k) to take advantage of the best perks and then put the rest of their money in another account.
For example, if your 401(k) offers matching contributions, it’s wise to invest enough to earn the full match. From there, then, you might decide to put the rest of your money in a Roth IRA to reduce your taxes in retirement.
You could also contribute to a health savings account, which can help cover medical expenses now and in retirement. If you’re eligible, you could get triple tax advantages: Your initial contributions are tax-free, your investments grow tax-free, and your withdrawals are also tax-free if the money goes toward qualifying healthcare expenses.
Investing in a 401(k) is a smart move, but maxing it out could make it more difficult to take advantage of other opportunities. By strategically investing in multiple accounts that offer unique perks, you could set yourself up for a more comfortable retirement without necessarily having to save more.
