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

It's hard to imagine any downside to putting $23,500 in your 401(k) in 2025. That amount of money could seriously improve your retirement readiness, especially if it has a few decades to grow before you need to use your funds.

But, like a lot of things, maxing out your 401(k) is a bit of a double-edged sword. Before deciding whether it's worth doing, it's helpful to understand how the drawbacks could affect you today and in the future.

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Lack of investment flexibility

When you put money into your 401(k), you limit yourself to the pool of investment options your employer makes available to you. Sometimes, these are fine. Other times, you might have to choose between expensive or ill-suited investment options that hamper the growth of your savings or force you to take on too much risk.

While you can ask your employer to add new investment options if you don't like what's available to you, it doesn't have to comply. And once you've added money to your 401(k), your employer may not permit you to roll it over to an IRA while you're still an employee. Each company sets its own rules about this.

Before investing in your 401(k), review your investment options to ensure they're a good fit for you. If not, you may want to save just enough in your 401(k) to get your employer match. Then, switch to an IRA. These accounts give you greater freedom to invest your money how you'd like. This can help you keep fees down, which may enable your savings to grow more quickly.

IRAs have lower contribution limits compared to 401(k)s, though. You can only set aside up to $7,000 in one in 2025, or $8,000 if you're 50 or older. These limits will rise to $7,500 and $8,600, respectively, in 2026. So you may need to switch back to your 401(k) once you hit these limits.

Access limitations

401(k)s are tax-advantaged retirement plans, and they're subject to IRS rules about when you can take money out of your account. Typically, you must wait until you're at least 59 1/2 to withdraw your money. Otherwise, you'll pay a 10% early withdrawal penalty on top of income taxes if the money comes from a traditional 401(k).

You can avoid the early withdrawal penalty if you meet one of the following criteria:

• Paying for birth or adoption expenses (up to $5,000 per child)
• Becoming totally and permanently disabled
• Sustaining economic loss as a result of a federally declared disaster (up to $22,000)
• Being a victim of domestic abuse (up to the lesser of $10,000 or 50% of the vested account balance)
• Covering an emergency personal expense (up to the lesser of $1,000 or the vested account balance over $1,000, once per calendar year max)
• Taking Substantially Equal Periodic Payments (SEPPs)
• Having an IRS levy on the plan
• Paying for unreimbursed medical expenses in excess of 7.5% of your adjusted gross income (AGI)
• Being a military reservist called to active duty
• Leaving your employer in the year you turn 55, or 50 for public safety workers (distributions allowed from that employer's 401(k) only)
• Having a terminal illness

SEPPs and the Rule of 55 are your best bet if you hope to retire early. But if you don't think those will work for you, you may prefer to stash some money in a different retirement account. Roth IRAs, for example, let you withdraw your contributions tax- and penalty-free at any age.

You could also keep some money in a taxable brokerage account. You won't enjoy the same tax break on your contributions, but you're also free to withdraw the funds at any time.

Having multiple retirement accounts at your disposal provides options, which makes planning your retirement withdrawals easier. Your 401(k) can be part of that plan. However, be sure you understand its limitations and have considered all available alternatives before committing to maxing out your account.

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