Why Retirement Savers Need to Think Twice Before Maxing Out Their 401(k)s

You may have been told that maxing out your annual contributions to a 401(k) year after year could be your ticket to a pretty sweet retirement. And there’s a lot of truth in that.

In 2025, the maximum allowable 401(k) contribution for workers under 50 is $23,500. For workers 50 and over, it’s $31,000. And beginning this year, workers between 60 and 63 can make “super” catch-up contributions that bring their annual 401(k) limits to $34,750.

It’s easy to see how contributing such large amounts of money to a 401(k) annually over many years would lead to a giant retirement plan balance. But while it’s not a bad idea to contribute some money to a 401(k) each year, putting all your eggs in that basket may not be the way to go. Here’s why.

Your investment choices may be limited

When you save for retirement in an IRA, you can invest in mutual funds, exchange-traded funds, individual stocks, or bonds, among other options. With a 401(k), you’re typically looking at funds alone. And that’s a problem for a couple of reasons.

First, when you invest in funds, whether they’re actively managed or passively managed index funds, you don’t get a say in where your money goes exactly — at least not the same way as you would with individual stocks.

Also, because 401(k) plans tend to limit you to a fairly limited menu of fund choices, you may find that your expense ratio — the percentage of your balance that you pay in investment management fees each year — is more substantial than you’d prefer. Those greater fees can eat into your returns over time, leading to less accumulated wealth overall. 

You’ll risk penalties for an early withdrawal

If you begin saving for retirement diligently in your 20s and you invest well, it’s conceivable that you could have enough money in your early 50s to feel comfortable wrapping up your career. The problem with having your savings tied up in a 401(k), though, is that you’ll generally be subject to a 10% early withdrawal penalty for removing funds before you’re 59 1/2.

Now, there is an exception with 401(k)s known as the rule of 55. It allows you to tap your 401(k) starting at 55 if you separate from the employer sponsoring that plan the year you turn 55 (or later).

But that doesn’t help you if you want to retire before age 55. It also doesn’t help you if the bulk of your savings isn’t in your current employer’s 401(k) at 55 but rather held in a 401(k) from a previous employer.

Don’t only save in a 401(k)

There’s nothing wrong with using a 401(k) plan to build your retirement nest egg. And it absolutely pays to contribute at least enough money to your 401(k) each year to claim your employer match in full (assuming they offer one).

But before you try to max out your contributions to your 401(k) every year, think about branching out. Putting some of your money into an IRA or a standard brokerage account could open the door to more investment choices.

Plus, though investing via a brokerage account lacks the tax advantages provided by dedicated retirement accounts, it gives you the option to withdraw money whenever you want to. If you’re a strong saver who thinks early retirement may be an option for you, then you’ll want to have at least some of your investments outside of tax-advantaged plans so you’re not roadblocked later on.