There are a number of retirement accounts that allow you to save and invest toward your retirement goals, but one of the most common in the U.S. is the 401(k). As of September 2020, 401k plans in the U.S. held an approximate $6.5 trillion in retirement assets, according to the Investment Company Institute.
An employer-sponsored 401(k) retirement account allows both you and your employer to make contributions. When you set up a 401k, you can opt to have a certain amount of your paycheck go directly to your 401k, and sometimes an employer will match employee contributions up to a certain percentage or dollar amount.
To max out a 401(k) for 2022, an employee would need to contribute $20,500 in salary deferrals—or $27,000 if they’re over age 50. Some investors might think about maxing out their 401(k) as a way of getting the most out of this retirement savings option. Here’s what you need to know about the benefits of maxing out a 401(k), any potential drawbacks, and exactly how to do it.
Should You Max Out Your 401k?
Retirement is important and many financial experts would suggest maxing out any employer match contributions.
But while you may want to take full advantage of any tax and employer benefits that come with your 401(k), you also want to consider other financial goals and obligations you have before maxing out your 401(k), including:
• Is all high-interest debt paid off? High-interest debt like credit card debt should be paid off first, so it doesn’t accrue additional interest and fees.
• Do you have an emergency fund? Life can throw curveballs—it’s smart to be prepared for job loss or other emergency expenses.
• Is there enough money in your budget for other expenses? You should have plenty of funds to ensure you can pay for additional bills, like student loans, health insurance, and rent.
• Are there other big-ticket expenses to save for? If you’re saving for a large purchase such as a home or a kid’s college fund, you may want to put extra money into this saving goal, at least for the time being.
Once you’re comfortable with other savings strategies, it might be time to explore maxing out your 401(k). There are many reasons to do so—it’s a way to take advantage of tax-deferred savings, employer matching (often referred to as “free money”), and it’s a convenient way to save, since the money gets deducted from your paycheck automatically, once you set up your contribution amount.
How to Max Out a 401k
For 2022, the 401k contribution limit is $20,500 in salary deferrals. Individuals over the age of 50 can contribute an additional $6,500 in catch-up contributions.
Yet, most people don’t know how to max out a 401k. According to a Vanguard study , only 12% of plan participants managed to max out their 401k in 2019. Here are some strategies on how to max out your 401(k).
1. Max Out 401k Employer Contributions
Your employer may offer matching contributions, and if so, there are typically rules you will need to follow to take advantage of their match. An employer may require a minimum contribution from you before they’ll match it, or they might match only up to a certain amount. They might even stipulate a combination of those two requirements. Each company will have its own rules for matching contributions, so review your company’s policy for specifics.
For example, suppose your employer will match your contribution up to 3%. So, if you contribute 3% to your 401(k), your employer will contribute 3% as well. Therefore, instead of only saving 3% of your salary, you’re now saving 6%. With the employer match, your contribution just doubled.
Since saving for retirement is one of the best investments you can make, it’s wise to take advantage of your employer’s match. Every penny helps when saving for retirement, and you don’t want to miss out on this “free money” from your employer.
If you’re not already maxing out the matching contribution, you can speak with your employer (or HR department, or plan administrator) to increase your contribution amount.
2. Max Out Salary-deferred Contributions
While it’s smart to make sure you’re not leaving free money on the table, maxing out your employer match on a 401(k) is only part of the equation.
In order to make sure you’re setting aside an adequate amount for retirement, consider contributing as much as your budget will allow. Individuals younger than age 50 can contribute up to $20,500 in salary deferrals per year—and if you’re over age 50, you can max out at $27,000.
Those contributions aren’t just an investment in your future lifestyle in retirement. Because they are made with pre-tax dollars, they effectively lower your taxable income for the year in which you contribute. For some, the immediate tax benefit is as appealing as the future savings benefit.
3. Take Advantage of Catch-Up Contributions
401(k) catch-up contributions allow investors over age 50 to increase their retirement savings—which is especially helpful if they’re behind in reaching their retirement goals. Individuals over age 50 can contribute an additional $6,500 for a total of $27,000 for the year. Putting all of that money toward retirement savings can help you truly max out your 401(k).
As you draw closer to retirement, catch-up contributions can make a difference, especially as you start to calculate when you can retire. Whether you have been saving your entire career or just started, this benefit is available to everyone who qualifies.
And of course, this extra contribution will lower taxable income even more than regular contributions. Although using catch-up contributions may not push everyone to a lower tax bracket, it will certainly minimize the tax burden during the next filing season.
4. Reset Your Automatic 401k Contributions
When was the last time you reviewed your 401k? It may be time to check in and make sure your retirement savings goals are still on track. Is the amount you originally set to contribute each paycheck still the correct amount to help you reach those goals?
With the increase in contribution limits this year, it may be worth reviewing your budget to see if you can up your contribution amount to max out your 401k. If you don’t have automatic payroll contributions set up, you could set them up.
It’s generally easier to save money when it’s automatically deducted; a person is less likely to spend the cash (or miss it!) when it never hits their checking account in the first place.
If you’re able to max out the full 401(k) limit but fear the sting of a large decrease in take-home pay, consider a gradual increase such as 1%—how often you increase it will depend on your plan rules as well as your budget.
5. Put Bonus Money Toward Retirement
Unless your employer allows you to make a change, your 401(k) contribution will likely be deducted from any bonus you might receive at work. Many employers allow you to determine a certain percentage of your bonus check to contribute to your 401(k).
Consider possibly redirecting a large portion of a bonus to 401k contributions, or into another retirement account, like an IRA. Because this money might not have been expected, you won’t miss it if you contribute most of it toward your retirement.
You could also do the same thing with a raise. If your employer gives you a raise, consider putting it directly toward your 401(k). Putting this money directly toward your retirement can help you inch closer to maxing out your 401(k) contributions.
6. Maximize Your 401k Returns and Fees
Are you getting the most for your fees? Most people don’t know what they’re paying in 401k fees. By some estimates, the average fees for 401k plans are between 1% and 2%, but some outliers can have up to 3.5%. Fees add up—even if your employer is potentially paying the fees, you’ll have to pay them if you leave the job and keep the 401k.
Essentially, if an investor has $100,000 in a 401(k) and pays $1,000 or more in fees, the fees could add up to thousands of dollars. Any fees you have to pay can chip away at your retirement savings and reduce your returns.
It’s important to ensure you’re getting the most for your money in order to maximize your retirement savings. If you are currently working for the company, you could discuss high fees with your HR team. One of the easiest ways to lower your costs is to find more affordable investment options. Typically, the biggest bargains can be index funds, which often charge just 0.3% to 0.5 %
If your employer’s plan offers an assortment of low-cost index funds or institutional funds, you can invest in these funds to build a diversified portfolio.
If you have a 401(k) account from a previous employer, you might consider moving your old 401k into a lower fee plan. It’s also worth examining what kind of fund you’re invested in and if it’s meeting your financial goals and risk tolerance.
What to Do After Maxing Out a 401k?
If you max out your 401(k) this year, pat yourself on the back. Maxing out your 401(k) is a financial accomplishment. But now you might be wondering, what’s next? Here are some additional retirement savings options to consider if you have already maxed out your 401(k).
Open an IRA
An individual retirement account (IRA) can be a good complement to your employer’s retirement plans. The pre-tax guidelines of this plan are pretty straightforward.
You can save up to $6,000 pre-tax dollars in an IRA if you meet individual IRS requirements for 2021 and 2022.
If you’re 50 or older, you can contribute an extra $1,000, totaling $7,000, to an IRA.
You may also choose to consider a Roth IRA. Roth accounts have income limits, but if you’re eligible, you can contribute with after-tax dollars, which means you won’t have to pay taxes on withdrawals in retirement as you do with traditional IRAs.
You can open an IRA at a brokerage, mutual fund company, or other financial institution. If you ever leave your job, you can roll your employer’s 401(k) into your IRA without facing any tax consequences as long as they are both traditional accounts. This may allow you to invest in a broader range of investments with lower fees.
Recommended: 401(k) vs. IRA: Which Is Better for You?
Is your retirement piggy bank feeling light?
Start saving today with a Roth or Traditional IRA.
Boost an Emergency Fund
Experts often advise establishing an emergency fund with at least six months of living expenses before contributing to a retirement savings plan. Perhaps you’ve already done that—but haven’t updated that account in a while. As your living expenses increase, it’s a good idea to make sure your emergency fund grows, too. This will cover you financially in case of life’s little curveballs: new brake pads, a new roof, or unforeseen medical expenses.
The money in an emergency fund should be accessible at a moment’s notice, which means it needs to be liquid. You’ll also want to ensure the account is FDIC insured, so that your money is protected if something happens to the bank or financial institution.
Save for Health Care Costs
Contributing to a health savings account (HSA) can reduce out-of-pocket cost for expected and unexpected health care expenses. For 2022, eligible individuals can contribute up to $3,650 pre-tax dollars for an individual plan or up to $7,300 for a family plan.
The money in this account can be used for qualified out-of-pocket medical expenses such as copays for doctor visits and prescriptions. Another option is to leave the money in the account and let it grow for retirement. Once you reach age 65, the funds are tax-free when you use them for qualified medical expenses. If you spend the funds in other ways, they are taxed as income with no penalties.
Increase College Savings
If you’re feeling good about maxing out your 401(k), consider increasing contributions to your child’s 529 plan (a tax-advantaged account meant specifically for education costs, sponsored by states and educational institutions).
According to the College Board , the average yearly cost of a private four-year college is $32,410. Helping your children pay for college helps minimize the burden of college expenses, so they don’t have to take on many student loans.
Open a Brokerage Account
After you max out your 401(k), you may also consider opening a brokerage account. Brokerage firms offer various types of investment account brokerage accounts, each with different services and fees. A full-service brokerage firm may provide different financial services, which include allowing you to trade securities.
Most brokerage firms require you to have a certain amount of cash to open their accounts and have enough funds to account for trading fees and commissions. While there are no limits on how much you can contribute to the account, earning interest or dividends are taxable. Therefore, if you earn a profit or sell an asset, you must pay a capital gains tax. On the other hand, if you sell a stock at a loss, that becomes a capital loss. This means that the transaction may yield a tax break by lowering your taxable income.
For people who have the extra money in their budget to do so, maxing out a 401(k) can be an effective way to build retirement savings. By taking advantage of things like employer matching, catch-up contributions, automatic payroll deductions and more, it’s easy to start saving more for retirement.
And once you max out your 401(k)? There are other smart ways to direct your money. If you’re looking to roll over an old 401(k) into an IRA, or open a new one, SoFi Invest® can help. And if you’re considering diversifying your retirement portfolio, it might make sense to look into an automated investment account with SoFi Invest.
With an automated investment account, you can tailor your investments based on your goals, your age, and the estimated retirement date. All you have to do is allocate a dollar amount you want to contribute and let the SoFi team handle all the auto-investing and auto-adjusting.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.