6 strategies to maximize your 401(k) contributions

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A 401(k) is one of the best retirement plans in the US due to its tax advantages and wealth-growing capabilities. Contributions can even be automatically deducted from your paychecks. That means, for the most part, you can simply sit back and watch your nest egg grow.

That said, you can learn how to maximize your 401(k) benefits with a few simple steps. But make sure that you can still pay down any existing debt (such as student loans or car payments) and afford your necessary monthly expenses. You don’t want to contribute more to retirement savings than your budget can reasonably allow.

Here’s how to maximize your 401(k).

6 strategies for maximizing your 401(k) contributions

1. Start investing early

The goal of retirement savings is to have enough saved to still live comfortably by the time you’ve stopped working.

“The national retirement age in the US is 65, and according to the CDC, the average life expectancy in the US after reaching 65 is 83.3 years old. That means you could expect to spend at least 18.3 years in retirement, depending on your own personal circumstances,” says Alex Michalka, senior director of investments at Wealthfront.

Many young workers make the mistake of not contributing to their retirement accounts right out of the gate. If you’re in your 20s, you may feel like you have all the time in the world to start investing for retirement. But by not contributing to your 401(k) and investing the funds now, you’re missing out on an essential step to growing your wealth: time.

“The sooner you start investing for retirement, the more time your money has to grow. And every bit you contribute now to retirement savings can help you reach your retirement goals later on – just $100 each month can compound over the long term to make a big difference,” explains Michalka.

In 2023, workers under age 50 can contribute up to $22,500 into a Roth 401(k) or traditional 401(k). Folks age 50 or older can contribute an additional catch-up contribution of $7,500.

“Paying down any high-interest debt and living for today are both very important to consider, but if you skip signing up when a 401(k) is offered because you believe you’ll have more money later, you run the risk of waiting too long,” says Teresa Bailey, CFP and senior wealth strategist at Waddell & Associates.

The best way to increase your retirement savings is by contributing as much as you can as soon as possible. The advantage of a retirement savings account, like a 401(k) plan, is that it accumulates compound interest. So the longer the funds are invested your account, the more interest they accumulate.

2. Max out your 401(k) employer match

One of the main advantages of a 401(k) plan is the employer match. Employers may choose to match an employee’s contributions up to a certain amount. Here are some of the different employer-matching contribution formulas:

Dollar-for-dollar match: Your employer matches 100% of what you contribute to your 401(k) up to a certain percentage. For example, if your employer matches up to 3% of your annual income and you earn $75,000 a year, the maximum amount your employer would contribute is $2,250. Partial match: Your employer matches 50% of what you contribute to your account, up to a certain percentage. For example, if you earn $75,000 a year and your employer matches half of your contributions up to 3% of your salary, the maximum your employer would contribute is $1,125.

An employer may agree to match anywhere from 1% to 10% of their employees’ yearly contributions. In 2022, the average employer match was 4.5%, according to a study by Vanguard.

You’re essentially earning free money by depositing a portion of your paycheck into your retirement savings. Maxing out your employer match contributions puts more money in your pocket for retirement.

But first, make sure to identify your individual 401(k) plan’s individual employer match rules and contribution limits. Unfortunately, not all 401(k) plans are generous in their offerings (some plans don’t even offer an employer match).

3. Become 100% vested in your 401(k)

Maxing out your employer-match contributions is key to maximizing your 401(k) plan. but it may all be for nothing if you’re not 100% vested in your retirement savings plan.

Unlike SIMPLE 401(k) and safe harbor 401(k) plans — which require employees to become fully vested immediately — vesting for traditional and Roth 401(k)s can take years to acquire. If you leave your job before becoming fully vested, your employer may withdraw previous contributions.

“Any funds you contribute to your plan are 100% yours. However, some deposits made by an employer have a vesting schedule attached, and the employee must work for the company for a certain number of years before they fully own 100% of the employer-contributed portion of their account balance,” says Bailey.

Being fully vested in your 401(k) plans means you have complete ownership. Once you become 100% vested, any and all employer contributions to your account are yours to keep. The Internal Revenue Code (IRC) determined that vesting can take no more than six years, and employers have to choose between the following two vesting schedules:

Graded vesting: This schedule gradually awards employees a vested percentage over no more than six years.Cliff vesting: This schedule allows employees to become 100% vested all at once in three years or less.

Employers can allow employees to be fully vested before these timelines if they wish.

You may be able to become fully vested if you meet one of the following criteria:

Your current employer’s retirement plan is fully or partially terminatedYou qualify for an employer’s early retirement age provisionYou reach full retirement age for Social Security benefits (age 66 or 67)

4. Max out the tax advantages

401(k)s are tax-advantaged accounts, and the more you contribute to your 401(k) — whether it be a traditional or Roth plan — the more you can utilize its tax advantages.

Contributions to a traditional 401(k) plan are pre-tax, which means that you won’t pay tax on the money being deposited into your account. You’ll only pay tax on the amount you withdraw when you’re at least age 59 1/2. Plus, the compound interest you earn inside your 401(k) is also not subjected to be taxed until withdrawn.

You get the advantage of the initial tax break when you contribute to a traditional 401(k). Contributions lower your yearly taxable income, which means you’ll pay less in taxes.

A Roth 401(k) plan, on the other hand, is funded with after-tax dollars. Although you won’t get the benefit of the initial break that a traditional plan provides, the money in your account grows completely tax-free. So you won’t pay tax on withdrawals. A Roth 401(k) plan is best for folks who expect to be in the same or higher tax bracket when they retire.

“A participant can maximize their tax break in several ways. The simplest way is to contribute as much as you can up to the limit,” explains Bailey, “A more complex planning tool is to work with a financial advisor to run long-term planning scenarios and find your optimal mix of traditional and Roth contributions that help you both in the current tax year and in future retirement years.”

5. Max out your catch-up contributions

If you’re age 50 or older, you can contribute an additional catch-up contribution up to $7,500 in 2023. The maximum catch-up contribution in 2022 was 6,500. Catch-up contributions don’t have as much time to accumulate compound interest, but can still significantly grow your wealth.

Moreover, you can still utilize your 401(k)’s tax advantage. But keep in mind that’s part of the SECURE 2.0 Act, people earning over $145,000 per year won’t be able to put catch-up contributions into a traditional 401(k) plan starting in 2026. Instead, catch-ups must be deposited into a Roth 401(k).

Starting in 2025, workers age 60 to 63 can make catch-up contributions of $10,000 or 50% more than the regular catch-up contribution (whichever is greater).

6. Minimize your 401(k) fees

A 401(k) plan, like any managed investment account, charges investment fees and management fees. Employers generally pay these fees while you’re an employee. But once you leave, whether for retirement or a new opportunity, those fees will become your responsibility.

These fees generally fall from 0.5% to 2% or more, depending on the plan. For example, if you have $100,000 in your account and pay about 1% in annual fees, you’ll end up paying around $1,000. This also means that as the funds in your account grow, so will your fees.

However, you may be able to reduce these fees by switching to more affordable investment options like low-cost index funds. Index funds are a great way to diversify your investment portfolio and often charge lower fees compared to other assets.

You can discuss switching to more affordable investment options through your company’s HR. If you’re no longer working at that place of business, you can reach out to the firm managing your account or transfer your assets into a different, lower-fee plan.

Check out Insider’s guide to the best rollover IRAs>>

How to maximize your 401(k) — Frequently asked questions (FAQs)

Yes. It can be a good idea to max your 401(k) to get the maximum tax benefit, maximum employer match, and accumulate more interest. However, you should only contribute as much as is reasonable in your current budget. The money in 401(k) is designed to go untouched until you are at least 59 1/2.

An employer will only match up to a certain percentage of your contributions. For example, if your employer matches up to 3% of your annual income and you earn $75,000 a year, then the maximum amount your employer would contribute is $2,250. Even if you max out your 401(k), your employer will only match up to that 3%.

If you max out your 401(k) every year, you’ll receive the maximum benefit offered through this retirement savings plan. But you won’t be able to access the money in your 401(k) plan until you’re at least 59 1/2. So only contribute funds you are able to part with until that point.

The best way to max out your 401(k) is by making the maximum contribution to your account, maxing out your employer match, becoming vested, contributing catch-ups (if applicable), and lowering management and advisory fees. It’s also important that you don’t touch the money deposited into your 401(k) so your investments can continue to grow.

The salary you should have to max out your 401(k) depends on your individual financial situation, including monthly expenses and financial goals. The maximum contribution limit for people under 50 in 2023 is $22,500 (folks 50 or older can contribute an additional $7,500). To max out your 401(k), you’d need to have $22,500 in additional funds. If you’re planning on buying a house, getting married, or having kids soon, this may not be the best option for your money right now.

What should you do after maxing out your 401(k)?

After you reach the maximum contribution limit in your 401(k), you won’t be able to contribute additional funds to your account. If you still have money to spare, consider opening a different type of investment account on top of your 401(k). This account can also be designated for retirement savings, such as an IRA, or could be an education savings account or regular brokerage account.

“Since parents can open custodial IRA for their children as soon as they have their first lemonade stand, babysitting gig, or lawn mowing service, it’s never too early to start the discipline of retirement savings,” says Bailey.

Remember that money deposited into your 401(k) can’t be withdrawn until you’re at least 59 1/2. Otherwise, you’ll be subject to a 10% penalty fee. For this reason, consider dividing up your savings into different nest eggs depending on your financial goals.

“While saving for retirement is important, you also need to make sure you’re set up for the near term. It’s crucial to get a secure financial footing before focusing too much on retirement,” says Michalka.

Michalka also emphasizes the importance of having an emergency fund that is between three and six months’ worth of take-home pay, as well as the means to pay down debt with a 7% interest rate or more. Putting off paying down existing debt (such as credit card or car payments) will only hurt you in the long run.

Individual retirement accounts (IRAs) are also tax-advantaged savings accounts with more flexible investment options compared to 401(k) plans. However, your existing 401(k) policy may prevent you from contributing to an IRA. Before attempting to open an account, talk with a CFP or financial advisor for personalized advice.

Tessa Campbell

Junior Investing Reporter

Tessa Campbell is a Junior Investing Reporter for Personal Finance Insider. She reports on investing-related topics like cryptocurrency, the stock market, and retirement savings accounts. She originally joined the PFI team as a Personal Finance Reviews Fellow in 2022.

Her love of books, research, crochet, and coffee enriches her day-to-day life.