What to Know About Maxing Out (or Not Maxing Out) Your 401(k) Contributions

You’ve probably heard the advice that you should max out your 401(k). That might be a recommendation worth following, but it may not be the best option for your situation. Here are some things to know.

What Does Maxing Out Your 401(k) Mean?

Maxing out your 401(k) contribution means hitting the legal limit set by the IRS. For most people, that’s $24,500 in 2026. There are additional catch-up contribution amounts for those over 50 ($8,000 in 2026) or those age 60-63 ($11,250 in 2026). 

Why Wouldn’t You Max Your 401(k)?

The decision about how to save for retirement is personal and dependent on your financial situation. In general, it’s a good idea to contribute enough to get your employer’s matching contribution, since that’s essentially free money. The employer match is usually a percentage of your salary and based on the amount you contribute yourself. But contributing up to the IRS maximum is a different story – and may not always be the best move. Here’s when you may not want to max out your contributions.

You Have Other Financial Priorities 

It might be better to use your money to:

• Pay off high-interest credit card debt
• Build an emergency fund
• Pay for sufficient health, disability, life and long-term care insurance
• Build a cushion for medical expenses, especially if you have a high-deductible health insurance plan

You Might Overextend Yourself

If you save too much, you could find yourself needing to withdraw money early to make your budget work or to pay for emergencies. That means you could face taxes and early withdrawal penalties.1

If you’re trying to figure out how to max out your 401(k) but your budget is tight, one option is to increase contributions gradually over time. For example, you could increase by 1% each year or bump up your contributions whenever you receive a raise.

You Have Other Investment Options

Many people consider opening an IRA (traditional or Roth) after they get their company match but before they’ve maxed out their 401(k). This may be because the IRA offers lower account fees or additional investment options.  Roth IRAs also have greater flexibility with withdrawals: you can withdraw your original contributions at any time penalty-free, giving you the option to fall back on your retirement accounts if you’re in need. There may also be tax benefits, depending on if your accounts are funded with pre-tax dollars or post-tax dollars. 

Another option is contributing to a health savings account if you have a high-deductible health insurance plan. You fund the account with pre-tax dollars, and withdrawals for qualified medical expenses are tax-free. When you turn 65, you become eligible to make withdrawals for any reason, so you can use it like any traditional retirement account. While you do have to pay income tax on those withdrawals, withdrawals for qualified medical expenses remain tax-free.

If you have an old retirement account you’re looking to roll over or an immediate sum of money to put toward your retirement savings, you may want to look into an annuity. Most annuities are structured to provide guaranteed income, which can give you a steady, reliable paycheck in retirement. 

The Bottom Line

There are a variety of ways to save for retirement, and there isn’t a one-size fits all approach. When you have questions about saving for retirement, a Farm Bureau agent can help.