Should You Max Out Your Retirement Accounts?

Quick Answer

Maximizing retirement savings can require tens of thousands of dollars in contributions every year. Depending on your financial goals, though, it might not make sense to put all of your eggs in one long-term basket.

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The decision of whether to max out your retirement contributions every year is a personal one and often depends on your ability to save, your progress toward retirement and other financial goals.

Here are some things to keep in mind as you determine the right path for you.

What Are the Limits on Retirement Contributions?

Qualified retirement plans are special because they offer certain tax advantages. For example, some may allow you to deduct your contributions from your income when you file your tax return, while others may allow you to invest and grow your contributions on a tax-free basis.

That said, the IRS imposes limits on how much you can contribute to qualified retirement plans each year. Here's what to expect with the most common types of accounts:

Retirement Plan Contribution Limits
Retirement Plan 2022 Contribution Limit Catch-Up Contributions (Age 50 or Over)
401(k), 403(b) and 457(b) plans $20,500 Up to $6,500
Individual Retirement Account (IRA) $6,000 Up to $1,000
Simplified Employee Pension (SEP) IRA Lesser of 25% of compensation or $61,000 N/A
Savings Incentive Match Plan for Employees (SIMPLE) IRA or 401(k) $14,000 Up to $3,000

With most employer-sponsored retirement plans, the contribution limit is for the account holder. With a 401(k) plan, for instance, any matching contributions from your employer don't count toward your $20,500 limit. The exception is with a SEP IRA, where only the employer can make contributions.

With an IRA, anyone can technically contribute to your retirement account, but the $6,000 limit includes both your contributions and contributions made on your behalf. Additionally, if you have more than one IRA, the $6,000 limit applies to all combined contributions to those accounts.

Finally, keep in mind that there may be limitations to your contributions, or even your tax benefits, depending on your income level and other factors. Consult with a tax professional for more information about your situation.

What Are the Benefits of Maxing Out Retirement Contributions?

Saving as much money as possible for retirement can help ensure that you have enough income to maintain the lifestyle you want once you stop working.

As a basic example, let's say that you start saving $20,500 each year in your 401(k) at age 30. If you plan to retire at 65, assuming a 7% average annual return, you'll have $3,032,226 in your account when you leave the workforce. However, if you start five years earlier at 25, you'll end up with $4,378,996.

Of course, there are several other factors to consider, including inflation, adjustments to contribution limits over time, expected Social Security benefits and more. But the important thing is that the sooner you start saving and the more you sock away in your retirement accounts, the more money you'll have when you're ready to retire.

Other potential benefits include:

  • Reducing your taxable income based on your contributions to certain qualified retirement accounts
  • Getting a matching contribution from your employer to increase your savings rate
  • Taking advantage of tax-deferred or even tax-free growth on your gains
  • Possibly being able to retire early
  • Having more flexibility with your lifestyle in retirement

When Does It Not Make Sense to Maximize Retirement Contributions?

There are a lot of reasons to focus on building your retirement as early and as much as possible. But there are also some potential drawbacks to keep in mind:

  • It may not be possible. If you're struggling with student loan debt, medical bills or a low income, even thinking about retirement may not be on your radar. While it's still important to keep in the back of your mind, it may make more sense to focus on your current financial needs until you have some breathing room.
  • There are limits on withdrawals. With most retirement plans, you can't take money out of your account without incurring a penalty and a tax bill. While there are some exceptions, putting all of your money into retirement may come back to bite you if you need to withdraw money for more immediate needs.
  • It could limit your progress toward other goals. A healthy financial plan is a balanced one. If you're putting so much toward retirement that you don't have sufficient emergency savings, money for a home down payment or enough cash for other goals that are important to you, you could experience some negative financial consequences in the long run.
  • You could get more value paying down high-interest debt. On average, the stock market returns 7% annually. But if you have credit card debt at a rate two or even three times as much, you might get more bang for your buck by paying off your debt before maximizing your retirement savings.
  • You can't diversify as well. While having money in a tax-advantaged retirement account is always a good idea, you may get more benefit from diversifying your portfolio with other passive income strategies to supplement your retirement savings.
  • The future is uncertain. Saving for the future is important, but there's no guarantee you'll be around to enjoy the fruits of your labor. Setting reasonable goals for yourself can help you find a good balance between preparing for the future and enjoying the present.

Work With a Financial Advisor to Develop the Right Strategy for You

As you try to strike the right balance between your future, your current lifestyle and your other financial goals, there are plenty of online retirement calculators that you can use to get an idea of how much you should save to achieve your goals.

However, it may also make sense to consult with a financial advisor to determine how to proceed. An advisor not only has the expertise and resources to crunch the numbers, but they can also provide you with objective advice based on what's most important to you.