August 31, 2020
By Rahul Iyer
In 2020, you can contribute up to $19,500 in your 401K, but not everyone should take advantage of this option.
Maxing out your 401K is a great option if you’re caught up elsewhere financially, but what if you aren’t? What signs should you look for that say maybe you shouldn’t max it out just yet?
Check out the reasons below!
Even if your salary is high enough to max out your 401K, your other financial circumstances may tell another story. If any of the following apply, don’t max out your 401K and instead take care of the issue:
· You don’t have an emergency fund set up. Your emergency account should have 3 to 6 months’ worth of expenses in it.
· You have a lot of high-interest debt that you only make minimum payments on because you invest the rest in your 401K.
· You’ve achieved all other short-term financial goals, such as buying a house, buying a car, or other major purchases you’ve wanted to make.
Putting all your extra money toward retirement is great for your future, but it can take away from your current financial status if you haven’t saved for your current financial goals.
At the very least, invest as much in your 401K as your employer will match. It’s like getting free money, so don’t give it up. Beyond that, decide what percentage of your funds you should invest in your future and what you should invest for short-term or mid-term goals.
In other words, find a happy medium so you can fund today’s dreams and still fulfill your retirement goals.
Putting all other circumstances aside – investing strictly in your 401K may not be the best financial decision. It depends on the costs involved. If the sponsor’s fees are high, it takes away from your investment. Are there other less expensive investments you can consider?
Again, max out the amount your employer will match, but consider what to do with the rest (Lendtable is a service that can help you max out your employer match). Will you save more if you invest in an IRA (traditional or Roth)? The maximum amount you can invest is much less, but if you contributed to your 401K already, you may only have a small amount to invest. In 2020, you can contribute up to $6,000 in your IRA.
IRAs often have lower fees and more investment choices – putting you in the driver’s seat of your investments.
There isn’t a one-size-fits-all approach here. If you’re set in all other areas of your financial life, then yes you can max it out. If you have other areas that could use some attention, though, or your 401K fees are high, you have other options that can set you up for retirement just as well.
Remember, it’s about diversifying. You don’t have to get all your retirement funds from one place and if you diversify the risk, you have a higher chance of retiring with more money in your pocket.