To get the most out of your tax-advantaged 401(k) retirement saving plans, aim to contribute as much as you can. The Internal Revenue Service (IRS) sets annual limits for how much you can contribute, but that doesn’t always mean contributing up to that limit is in your best financial interest—or even possible. You’ll need to weigh several factors about your financial situation to help you determine the ideal contribution amount.
Let’s look in more detail at the pros and cons of maxing out your 401(k) contribution early in the year, as well as strategies for saving the maximum amount.
Key Takeaways
- Review your budget and financial goals to help you determine whether to max out your 401(k) early in the year.
- Prioritize contributing at least up to your company’s matching contribution limit so you’re not leaving “free money on the table.”
- If you have a lower income, you may not have the extra funds to max out your 401(k) early in the year after paying for necessities.
- People with higher levels of income may find it easier to max out their annual 401(k) contribution.
How 401(k) Plans Work
The 401(k) plan is a popular way to save for retirement because of its tax advantages. With traditional 401(k)s, your contributions are made with pretax money, so your tax bill is reduced. With Roth 401(k)s, you make contributions after paying income tax, but then you can make tax-free withdrawals in retirement, including any earnings.
Not every employee contributes up to the maximum each year, and many don't contribute at all. About half of private industry workers (52%) and 82% of state and local government workers participated in employer-provided retirement plans in March 2022. Of course, not every worker has access to a employer-provided plan: 69% of private industry workers and 92% of state and local government workers do, which equates to a take-up rate of 75% for private industry workers and 90% for state and local government workers, respectively. Put another way: 3 in 4 private industry workers who are offered a retirement plan through their employer contribute to that plan. For state and local government workers, it's 9 in 10.
How much you contribute will depend on your budget and financial priorities.
How Do You Max Out a 401(k)?
The IRS sets annual contribution limits on how much you can contribute. For 2023, the maximum amount that you can contribute to a 401(k) plan is $22,500, or $30,000 if you’re age 50 or older thanks to the $7,500 catch-up contribution. For 2024, you can contribute up to $23,000 to a 401(k) plan, and up to $30,500 if you are age 50 or older since the catch-up contribution remains at $7,500.
If you can meet these maximums, you can more quickly benefit from the power of compound interest and receive more tax benefits. One way to max out a 401(k) early in the year is to have regular contributions withheld from your paychecks in amounts larger than you would need to reach the maximum in 12 months.
Let's take this example. Say you're under age 50 and paid biweekly. (So there are 26 pay periods in a year.) If you contribute about $885 per pay period in 2024, you will max out your 401(k) near the end of the year. If you contribute double that—about $1,770 every two weeks—you would max out your 401(k) during the summertime, after 13 pay periods, at the midpoint of the year.
How Many People Max Out Their 401(k)?
Maxing out a 401(k) early in the year is difficult for most workers. In 2022, just 15% of 401(k) participants contributed the maximum amount of $20,500 ($27,000 for participants age 50 and older), according to a study conducted by Vanguard.
Those who contributed the yearly maximum typically had “higher incomes, were older, had longer tenures with their current employer, and had accumulated substantially higher account balances," according to the Vanguard study.
Your income level, necessary expenses, and financial priorities all play a role in whether you should save up to the maximum. For example, it’s important that you pay your mortgage before aggressively saving for retirement, or you could lose your home to foreclosure.
Consider Debt Before Maxing Out a 401(k) Early
When deciding whether you max out your 401(k) early in the year, consider how your debt is affecting your finances. Interest on your debt can add significantly to your long-term expenses. Debt like credit cards, car loans, student loans, and personal loans can also negatively affect your credit score, which in turn can affect your ability to get other loans.
Consumer debt in the United States, which includes mortgages, reached $17.3 trillion in the third quarter of 2023, with the total average balance being $104,215, up from $101,915 in the same period a year earlier, according to Experian.
It often makes more sense to pay down high-interest revolving debt before aggressively saving for retirement. But you might find that maxing out your 401(k) early before you pay down your mortgage can also make sense. Weigh your expected rate of return on a 401(k) portfolio against the interest you will pay on your debt to help you decide where you allocate your extra funds.
Prepare for Emergencies
Another financial factor to consider before you decide to max out your 401(k) early is whether you have an adequate emergency fund. An emergency fund can help keep you in good financial standing when you face an unexpected cost like a major car repair or medical expense.
Many financial advisors recommend setting aside three to six months’ worth of expenses, but the right size of emergency fund for you depends on other factors like your lifestyle and debts.
Once you contribute to a 401(k), you typically cannot access that money without penalties before you are 59½ years old. So, building an emergency fund that you can access easily may be a higher priority for many people than maxing out a 401(k) early.
Nearly two-thirds of American adults (63%) in a 2023 Federal Reserve survey said they would be able to pay for a sudden $400 emergency expense with cash or its equivalent. And 13% said they would not be able to cover the expense by any method.
How to Get the Full 401(k) Match
Many 401(k) account holders aim to at least contribute up to the company match so that they can maximize their benefit. Employers typically match up to their own limit, not up to the IRS maximum. For example, they may match up to 3% of your salary.
If you cannot contribute up to the maximum IRS limit in a year, consider trying to make at least up to the matching contribution limit each year.
Can You Have Multiple 401(k) Accounts?
You can have multiple 401(k) accounts, but you can only make contributions through payroll deductions to an active 401(k) account. Many people have 401(k) accounts from previous employers, but you cannot contribute to an inactive account. If you have two jobs, each offering a 401(k) plan, you may contribute to both accounts. But the Internal Revenue Service (IRS) maximum contribution limit ($23,000 for 2024 for people up to age 50, or $30,500 if 50 or older, and $22,500 for 2023, or $30,000 for those aged 50 and over) applies to your total contributions.
What Happens If You Over-Contribute to Your 401(k)?
If you contribute more than the maximum allowed contribution in a year, you will have to report the excess contributions to the IRS using a 1099-R form. The excess funds will be removed from the account, and you will face a 10% penalty if you are under age 59½ since you will be effectively withdrawing those funds early. If the funds aren’t returned by April 15, you could be taxed again on those excess funds.
What Is the Maximum Employer Contribution to an Employee’s 401(k) Account?
For 2024, total employer and employee contributions cannot exceed the lesser of 100% of the employee’s total compensation or $69,000 (or $76,500 if age 50 or older). For 2023, the limit is to $66,000 (or $73,500 if age 50 or older).
The Bottom Line
Whether you should max out your 401(k) depends on your finances and your individual situation. There is no one-size-fits-all solution, because your salary, expenses, and financial priorities all play a part in whether you can and should contribute the full amount before the end of the year.
If you cannot afford to contribute up to the limit set by the IRS, try to contribute at least the amount needed to qualify for your employer match, if your plan offers one. Matching contributions are essentially free money.
