Should I max out my 401k?
For many of us, just getting a few hundred bucks into our 401k each month is considered a big win. But the truth is you can contribute quite a bit more than that. In fact, in 2016 the maximum amount you can contribute to your 401k is $18,000.
Here are some questions to ask yourself.
1. Have you fully funded your emergency fund?
If you don’t have an emergency fund, then you shouldn’t be maxing out your 401k. We’ve said many times on this site that the first, best thing you can do to build a solid financial future is start by building an emergency fund.
For more on emergency funds read: 4 STEPS FOR BUILDING AN EMERGENCY FUND AND PISSING OFF YOUR PARENTS
2. Are you maximizing your employer match?
Once you’ve made sure you prepared for emergencies, the next thing to do is make sure you’re contributing at least enough to maximize your employer match. If your employer matches your contributions, then make sure that you are taking that free money. Why is it important to take that free money? I just told you, IT’S FREE MONEY!!!
3. How much money do you make?
Another factor to consider is how much money you make because if your income is high enough, you wont be able to use other retirement accounts like a Roth IRA. Here are the income limits:
If you’re single the Roth IRA income limit is $132,000
If you’re married the Roth IRA income limit is $194,000
So if you find yourself fortunate enough to be in those income brackets and you’re not allowed to contribute to a Roth IRA, then it makes a lot of sense to be maxing out your 401k.
4. How much do you need for retirement?
We’ve generously pointed out before that thanks to the magic of compound interest – the earlier you start saving for retirement the less you will have to actually save.
If you’re in your 20s and think that you need to save around 10% of your income every year to meet your retirement goals. And if your company matches 3% of that then you can actually contribute 7% to meet your goals. Then you can use that extra money toward other financial goals like a down payment on a house.
But the question was, should you max out your 401k? The truth there is that there are often better investment options outside of your 401k. So once you’ve taken all that free money, it makes a lot of sense to you consider a Roth IRA.
Roth IRAs are valuable in a few important ways, for example unlike 401(k) contributions, Roth IRA contributions are post-tax. That means you they then grow tax-free and along with their earnings you won’t pay additional taxes on them when you withdraw them in retirement.
