By Larry Van Quathem, CFP®
If you’ve spent any time looking into retirement planning, you’ve likely heard that maximizing your 401(k) contributions is praised as the ultimate goal. It offers tax benefits and can be seamlessly integrated into your financial plan with automatic contributions. However, this approach may not always be the best choice. Here are five reasons why.
You May Have Other Financial Priorities
While saving for retirement is important, it’s not the only financial goal you may have. For example, you may be saving for a down payment on a home, paying off debt, or building up an emergency fund. If you funnel all your extra money into your 401(k), these other areas of your finances may end up neglected. Make sure you have a well-rounded financial plan that addresses all your priorities. To start, consider the following to help you assess other potential goals:
- Pay down any high-interest credit card debt.
- Build up an emergency fund with 3-6 months’ worth of living expenses.
- Make sure you have adequate health insurance.
- Review your estate plan: do you have a basic will or trust in place to safeguard your loved ones in your absence?
- Consider disability insurance in case an accident or injury prevents you from working for an extended period of time.
- If you are married or have dependent children, consider obtaining adequate life insurance.
You May Have Access to Better Investment Options Elsewhere
Most 401(k) plans offer a limited selection of investment options, which may not be the best fit for your strategy. Suppose you have other investment accounts, such as an IRA or taxable brokerage account. In that case, you may have access to a wider variety of investment options.
For example, let’s say your 401(k) plan only offers mutual funds but you’re interested in investing in individual stocks or exchange-traded funds (ETFs). In this case, an IRA or taxable brokerage account may be the better option. By diversifying your investments across multiple accounts, you can improve your returns and invest in the right mix of assets for your financial goals.
You May Want More Flexibility in Accessing Your Money
Contributions to a traditional 401(k) are tax-deductible, but withdrawals in retirement are taxed as income. Withdrawals prior to age 59.5 are subject to tax and a 10% penalty if you don’t meet the strict criteria for a hardship withdrawal. If you’re planning to retire early or have other income streams in retirement, you may want more flexibility in accessing your money. Roth IRAs, for example, allow you to withdraw your contributions at any time without penalty, and qualified withdrawals of earnings are tax-free. Consider whether a Roth IRA or other investment vehicle might give you more flexibility both now and in retirement.
You May Pay Less in Fees With Other Investment Accounts
When considering whether to max out your 401(k) contributions, it’s also important to take into account the fees associated with these plans. Though 401(k) plans are convenient, they can also be expensive, with costs including administrative fees, investment fees, and expense ratios, among others. These fees can eat into your investment returns over time and can be especially costly if you’re not paying attention to them. Make sure you understand the fees associated with your 401(k) plan and consider whether there are lower-cost investment options available to you. It’s worth seeking the advice of a financial advisor to help you navigate these fees to help you get the most bang for your buck.
If You Do Max Out Your 401(k), Know Your Limits
If you choose to max out your 401(k), it’s important to know your contribution limits. For 2024, you can defer as much as $23,000 into your 401(k) (increased from $22,500 for 2023). An additional $7,500 in catch-up contributions is allowed for those over 50.
One of the best parts of a 401(k) plan is that many employers offer matching contributions. The most common matching formula is 50% of employee contributions up to 6% of salary. This means your employer will contribute a maximum of 3% of your salary if you contribute 6%. Since employer matches are essentially free money and not considered income in the year received, it’s generally advised to contribute at least enough to get the maximum matching contribution, even if you don’t max out the full contribution amount.
We’re Here to Help You Make the Right Decision
Though maximizing your 401(k) contributions may benefit some, it’s not a one-size-fits-all solution for everyone. At ABLE Financial Group, we’re here to guide you toward the best decision customized to your specific retirement savings plan. Ready to take the next step? To learn more about our team and the ways we can support you, call 480.258.6108 or email adam@ablefinancialgroup.com today.
About Larry
Larry Van Quathem an Arizona native, has deep roots in the financial services industry. His father became a Financial Consultant for Merrill Lynch when Larry was just seven years old, sparking his early exposure to the world of finance. After obtaining a Bachelor of Science in Finance from the University of Arizona in 1993, Larry followed in his father’s footsteps just two years later. They worked together for over a decade until his fathers’ retirement in 2009. With 20 years of experience at Merrill Lynch, Larry joined ABLE Financial Group in 2015, seeing it as an opportunity to enhance service quality for his clients and have more control over service delivery .
As a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional, Larry excels at listening to each client’s personal goals and offers tailored approaches to help achieve those goals using a written plan of action. He creates a personalized service model for every client, serving as a financial coach working with corporate executives, and a deep knowledge of the college planning landscape.
Larry is actively involved in the community, currently serving on the Board of Governors for the Boys and Girls Club of Scottsdale. His past community service includes serving on the Board of Delta Sigma Pi Leadership Foundation, the Board of Directors for the Association for Supportive Childcare and being a past active member of the Scottsdale 20-30 club. Professionally, Larry has been a member of the Central Arizona Estate Planning Council since 2010.
Residing in Phoenix with his son Jake, Larry enjoys golf in his leisure time. He also shares his home with his French Bulldogs, Rocky and Birdie.
