Think Maxing Out a 401(k) Is Always Smart? This Might Make You Change Your Mind.

This year, 401(k) plan contributions max out at $24,500 for workers under 50 and $32,500 for those 50 and over. If you contribute the max to your 401(k) on an annual basis, by the time you retire, you may find yourself sitting on quite a lot of savings.

That doesn’t mean it makes sense to max out a 401(k) year after year. Here are a couple of reasons not to — and what to do instead.

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You may not like your investment choices

When you save for retirement in a 401(k), you’re limited to the investment options offered by that plan. But each 401(k) plan offers its own set of funds. If you don’t find funds in your workplace plan that align with your investment strategy, you could end up having to compromise.

Not being a fan of your 401(k)’s investment options is a good reason to seek out another home for your retirement savings, such as an IRA, which will typically let you hold assets ranging from exchange-traded funds to individual stocks. IRAs give you a tax break on your money, the same way 401(k)s do. So you may want to max out an IRA and then put additional funds you’re able to save into a 401(k).

You may not be able to access your money when you want to

When you first begin saving for retirement, it’s hard to look into the future and know when you’ll be ready to start withdrawing from that pile of money. But if you end up wanting to access your 401(k) before age 59 1/2, you could run into a problem.

You’ll generally face a 10% early withdrawal penalty if you tap your 401(k) balance before reaching 59 1/2. There is an exception called the rule of 55, which may give you access to your most recent 401(k) earlier than that if you separate from your employer in the calendar year you turn 55 or later.

Otherwise, early retirement may be difficult to pull off if you keep maxing out your 401(k). A better bet may be to put some of your long-term savings into a taxable brokerage account, so you won’t face restrictions on when you can take your money out.

The right way to approach your 401(k)

It’s easy to see why maxing out a 401(k) is appealing. Your contributions come right out of your paychecks, so you don’t have to think about funding your account every month.

But as you can see, maxing out a 401(k) year after year may not work out well for you. So it could pay to branch out into other accounts.

However, one thing you should absolutely make sure to do is contribute enough to your 401(k) each year to snag your workplace match in full. Leaving that money on the table is a mistake. Not only can it add to your 401(k) balance, you can also invest it so it grows into a larger sum over time.

Let’s say your company will match your first $3,000 in annual 401(k) contributions. In that case, by all means, put in that $3,000. You may even want to contribute more than that.

The point, however, is that hitting the max on your 401(k) every year may not give you the options you want in terms of investments and access to your money. Splitting your savings across different accounts could give you the best of all worlds — tax breaks, a wide array of assets to put money into, and the option to withdraw funds as early as you want to.

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