Before You Max Out Your 401(k) In 2023, Read This

(Maurie Backman)

For almost all of 2022, consumers have had to deal with sky-high living costs. That has forced many people to cut back on retirement plan contributions or even pause them altogether.

But in recent months, the rate of inflation has slowed, and the hope is that it will continue to do so in 2023. That could make funding a retirement plan more feasible. And if your financial situation really improves in the new year, you may end up in a position where you can max out the 401(k) plan your employer offers.

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At first, it may seem like a great idea. But before you max out your 401(k), you might want to think about whether that plan really meets your needs.

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There could be a better place for your money

While saving in a 401(k) is nice and convenient — your contributions are deducted directly from your paychecks so you don’t have to think about them — there are certain drawbacks you may encounter if you choose to save in your employer’s plan. .

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For one thing, your 401(k) can come loaded with fees. Some of them can be avoided by choosing the right investments, for example, choosing index funds instead of mutual funds or target dates, which often have higher expense ratios. But there are administrative fees attached to 401(k)s that can eat into your returns. If they’re important in your employer’s plan, you may want to put your savings into an account that won’t charge as much.

Then there is the question of how you will invest your money. You generally cannot choose individual stocks in an employer-sponsored 401(k). If you’re more of a hands-off investor, this might not be a problem. But if you’re someone who knows the market and knows how to analyze companies, then those are skills you might want to take advantage of. In that case, you may find that an IRA is a better option for your retirement savings.

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With an IRA, you can hand pick stocks and the fees tend to be lower. Also, not all 401(k) plans include a Roth savings option. But as long as you meet the income limits, you can choose to put money into a Roth IRA and enjoy the benefits of tax-free investment gains and retirement withdrawals, among others.

Don’t Rush to Max Out Your 401(k)

Maxing out your 401(k) might seem like a smart thing to do in 2023, especially if you’ve fallen behind on retirement savings recently. But before you go that route, think about how happy you are with your 401(k). You may find that an IRA works best for you.

That said, it’s always a good idea to contribute enough money to your 401(k) to claim the full match from your employer, assuming you qualify for one. That’s free money you don’t want to give up. But once you’ve gotten that match, you shouldn’t feel compelled to stick with your employer’s 401(k) just because the option is there.

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