In 2024, the 401(k) contribution limits have gone up. While last year you could contribute a maximum of $22,500 (plus an additional $7,500 catch-up contribution for those 50 or over), the 2024 limit is $23,000. The catch-up contribution remains the same as last year.
While you can contribute more to your 401(k) in the upcoming year, you may not actually want to make that choice. Here’s why.
You may have limited investment options in your 401(k)
Putting a ton of money into your 401(k) means you’re limiting the investment options available to you. Many 401(k) plans offer a choice of around a dozen or fewer funds to invest in. And that’s the extent of your choices when you use this kind of retirement plan.
If you’d prefer to put your money elsewhere, such as into shares of a specific company, you can’t do that with your 401(k) funds.
Rather than continuing to put money into such a restrictive account, it can make better sense to earn your 401(k) matching funds from your employer and then look into other kinds of tax-advantaged retirement accounts that provide more flexibility, such as IRAs.
The investments available to you might charge higher fees
Sometimes, the limited pool of investments in your 401(k) all come with high expense ratios. Your 401(k) plan may also charge administrative fees as well. All these fees eat into the returns you’re getting and reduce the amount of money you end up with.
Check to see how much investing in your 401(k) is actually costing you. You can review your account statements and check the details of your investments to see all the fees you’re being charged.
If you’re losing a good amount of your money to fees, the best course of action is to invest only enough to earn your full employer match and then switch to another retirement plan that gives you a choice of cheaper investments and no account fees. Most brokers don’t charge you for an IRA, and low-cost ETFs that track the performance of financial indexes like the S&P 500 can be extremely cheap.
Your distributions will all be taxable from a 401(k)
Finally, you must remember that while you get a tax break when you invest in a 401(k), you have to pay the IRS eventually. You’ll be taxed on withdrawals from your 401(k) in retirement. The money from your 401(k) distributions is also included when the government calculates whether you make enough money to make your Social Security benefits taxable.
If you want to try to keep your tax bill as low as possible in retirement, seriously think about investing only enough in your 401(k) to earn the employer match and then putting money into a Roth IRA and, if you’re eligible, an HSA.
Since a 401(k) can be expensive, have limited investment options, and cause you to face a higher tax bill as a retiree, increasing contributions to it isn’t always smart — even if you can invest more in 2024.
Instead, consider the downsides and look into what other options are available before maxing out your 401(k) plan. You may find there are better choices for at least some of your retirement funds.