3 Reasons Not to Max Out Your 401(k) in 2023

It’s really not a good idea to plan to retire on Social Security alone. For one thing, the program is facing benefit cuts that could leave current and future recipients with less retirement income.

Plus, even if Social Security isn’t forced to make cuts, those benefits will generally only replace about 40% of your pre-retirement wages, assuming you’re an average earner. Most seniors need a lot more income than that for a decent quality of life, which is why it pays to do what you can to build savings of your own.

Now if you happen to work for a company that sponsors a 401(k) plan, you may be inclined to do your best to max out. And this year, that means contributing $22,500 if you’re under the age of 50, or $30,000 if you’re 50 or older.

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Clearly, hitting these thresholds is not an easy thing if you earn an average salary. But if you’re a higher earner or someone who lives very frugally, then it’s doable.

But while saving as much money as you can for retirement is definitely a good thing, that doesn’t mean you should be maxing out your 401(k) plan. Here are a few reasons not to do so this year.

1. Your employer match has gone away

Many companies are taking steps to cut costs in light of recent recession warnings. If your employer has taken its 401(k) match off the table, you may not be as motivated to put money into that plan. And who could blame you?

In that case, you may be better off putting your money into a few different plans that will give you more options as far as investment choices go. IRAs, for example, commonly allow you to buy individual stocks, whereas 401(k) plans generally do not. So if you want that leeway, an IRA makes sense. And if you’re looking to save beyond what IRAs allow for (they max out this year at $6,500 or $7,500, depending on your age), you can put the rest of the money you want to earmark for retirement into a taxable brokerage account.

2. You don’t have an emergency fund

If the U.S. economy takes a turn for the worse in 2023, your job could end up on the chopping block. And if you don’t have money in the bank to cover your bills temporarily, you could wind up with a serious pile of debt on your hands.

That’s why it’s so important to have a solid emergency fund — enough money in the bank to cover a minimum of three months of bills. If you haven’t met that savings target, then you should prioritize your emergency savings, even if it means not maxing out your 401(k) plan this year.

Remember, taking a 401(k) plan withdrawal to cope with unemployment won’t get you out of paying an early withdrawal penalty if you’re not yet 59 1/2. And that assumes your plan will even allow for such a withdrawal, which it may not. So you’re better off putting your near-term savings ahead of your long-term savings.

3. You have costly credit card debt you need to shed

Carrying a credit card balance is bad news these days. The Federal Reserve most likely isn’t done raising interest rates despite a recent cooling of inflation. And that means that your credit card debt could get even costlier if you continue to carry it. Rather than put all of your extra money into a 401(k) plan, use some of it to shed your debt.

Maxing out a 401(k) could do a lot for your retirement. But that doesn’t mean it’s the right choice for 2023. If these factors apply to you, you may want to adopt a different strategy over the next 12 months.

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