Should You Max Out Your 401(k) Contribution?

For those of you who are asking yourselves if you should max out your 401(k) contribution, your off to a good start in regards to smart retirement planning. Thinking through your retirement savings strategy is the first step to ensuring you will have the nest egg you are hoping for later in life.

The 401(k) has been in place for decades and is often considered the ultimate retirement plan. However, if you dig deeper, you will find that placing all your money and trust into your 401(k) may not be your best bet. The government allows participants to contribute up to $19,000 a year, this comes to $1,583 per month. That’s a considerable amount of money! So, unless you have special circumstances, you may not want to max out your 401(k) contribution. Instead, it could work to your advantage to start allocating a portion of your earnings elsewhere.

Maxing Out Your 401(k) May Negatively Impact Your Savings

Your goal should be to maximize your retirement funds and utilize the most effective strategies to make it happen. If a 401(k) is part of this plan, know that although it may be a popular and familiar strategy for building up a retirement fund, that doesn’t mean it will bring you the best return on your investment. With that in mind, you may want to think twice about allocating extra funds to your 401(k). Take a look at these three factors that may change your mind if you are considering maxing out your 401(k).

1. 401(k) Fees Can Eat Away at Your Retirement Fund

Fees and 401(k) plans go hand in hand. Even so, many individuals don’t even realize these fees are part of their plan. They blindly let them chip away at their investment earnings! Large plans that are normally seen at big companies typically have fees under 1 percent. Some may offer fees that go as low as 0.50 percent. On the other hand, smaller companies have plans that are between 1.5 to 2 percent. Small plans can actually go beyond 2 percent in some cases. A 1 percent increase in fees could possibly cause you to run out of retirement funds ten years early. This is just a rough estimate, but you get the picture.

Typical Retirement Fees Include:

• Investment fees
• Service charges
• Administrative fees

Now that you are aware of the fees that can be attached to 401(k) plans, you may not be so eager to max out your 401k contribution. Instead, you might want to direct some of those extra funds into multiple retirement accounts with lower fees that help grow your savings.

2. Max Out Your 401k and You Just Might Create a Huge Tax Burden

We just accept the fact that a 401(k) is the most reliable and appropriate retirement fund to funnel all our money into. However, when you dive into the details, you may find that directing all your extra cash into your 401(k) can be a big mistake that can result in a huge tax burden.

Your 401(k) plan is tax-deferred, meaning, no taxes will be owed while you are building your nest egg. It’s not until you withdraw money that you will owe taxes on your savings. The issue with this is that most retirees will have a higher tax bracket by the time they retire. Money withdrawn from 401(k) plans are typically taxed at an individual’s normal income rate. This can sometimes be as high as 39.6 percent. That’s huge! You will work hard to build your retirement fund only to have the IRS take away a large portion of it!

The bottom line is that the ideal retirement plan would have your money invested in tax-deferred, taxable, and non-taxable accounts. This will allow you to have much more control over funds in regards to taxes. Now you are starting to see the light why maxing out your 401(k) contribution may not be the best choice.

A Few Ideal Options to Diversify your Retirement Funds:

Self-Directed IRA (Individual Retirement Account) – Utilize a self-directed IRA in addition to your 401(k) plan, it will allow you to grow your retirement fund and build great wealth. This specific type of IRA account provides you with more control over where your money performs. Two great examples would be investing in precious metals or real estate. Overall, a self-directed IRA allows for greater freedom and puts you in the driver’s seat.

“This is a tool of the wealthy. A true self-directed IRA gives you virtually limitless power to lend money to others, buy rental real estate, invest in businesses… all tax free! I own dozens of properties inside my SDIRA and that monthly rent from our tenants grows that account at an unbelievable rate. Also, when I cash out those gains at retirement age I won’t pay any additional taxes. Can your 401K do that? No way. ”  ― Clayton Morris, Former Fox News Host

High-Yield Online Savings Account – Instead of maxing out your 401k, open up a high-yield online savings account. Online savings accounts are capable of offering very high interest rates that can quickly grow your retirement funds. We utilize Marcus by Goldman Sachs and have nothing but outstanding things to say about their ability to grow our funds.