What's the Unfortunate Truth About Maxing Out Your 401(k)?

Contributing to a 401(k) is one of the best ways to save for retirement, and this type of account has several distinct advantages.

For one, it has a much higher contribution limit than many other retirement accounts. In 2025, you can invest up to $23,500 per year in a 401(k), while the contribution limit for traditional and Roth IRAs (individual retirement accounts) is just $7,000 per year.

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However, if you're contributing enough to max out your 401(k), it could potentially put you at a disadvantage in some ways. Here's how.

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Limited investment options could also limit your earnings

When you invest in a 401(k), you will generally have a handful of investment options set by your company plan, such as target-date funds or other types of mutual funds.

There's nothing necessarily wrong with these investments, but they offer little flexibility in where, specifically, you invest. If you prefer a more hands-on approach that is more likely to earn you above-average returns, it can be difficult, even impossible at times, to change your investments within a 401(k).

Other investing accounts, including IRAs, have far more options. From broad-market index funds to industry-specific exchange-traded funds (ETFs) to individual stocks, there are loads of investments out there that most 401(k)s simply don't offer. With the right strategy, these investments have the potential to significantly outperform many mutual funds included in 401(k) plans.

Also, many mutual funds found in 401(k)s have much higher fees compared to index funds and ETFs. Not only could you potentially earn more by investing in accounts outside of a 401(k), but you could potentially save thousands of dollars in fees, too.

Early (and late) retirement can be more expensive

If you plan to retire outside of your 60s and most or all of your savings are tied up in a 401(k), it can potentially throw a wrench in your plans.

Withdrawing money from your 401(k) before age 59 1/2 will generally result in a 10% penalty on the amount you withdraw. Individuals who are at least 55 years old can sometimes avoid these fees, but that only applies to the 401(k) plan through your most recent employer -- not all your older plans from previous jobs.

On the other end of the spectrum, delaying retirement well into your 70s can also create hiccups. At age 73, older adults will need to begin taking required minimum distributions (RMDs) from their 401(k) accounts. This is because 401(k) contributions are tax-exempt and tax-deferred, and mandatory withdrawals ensure that the government eventually gets its tax income.

There are also some RMD exceptions for those still working. If you own less than 5% of the company you work for, you could potentially delay RMDs until you retire. However, as with early withdrawals, this only applies to the 401(k) sponsored by your current company, not any previous accounts.

If you plan to retire far earlier or later than most traditional workers, it may make more sense to contribute to a Roth IRA, Roth 401(k), or taxable brokerage account. These options offer more flexibility in withdrawals, which can give you more choice in when you retire.

When it pays to stick with a 401(k)

Even if your 401(k) is less than ideal, there's still a fantastic reason to continue contributing to it: employer matching contributions. If your employer matches your 401(k) contributions, that's essentially free money -- and it could increase your savings by thousands of dollars per year.

Keep in mind, too, that there's no reason you can't contribute to multiple accounts. You may invest enough in your 401(k) to earn the full employer match, for example, then stash the rest in a Roth IRA to avoid RMDs. If you max out an IRA, you may then opt to put the rest in a brokerage account for more investment options.

The 401(k) is an incredibly powerful tool. But if you're putting all your eggs in one basket by maxing out this account, you could be missing out on fantastic perks from other types of accounts. With a more balanced approach, you can earn more, save more, and set yourself up for a better retirement.

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