Should I max out my retirement accounts?

The idea of maxing out your retirement accounts sounds like a no-brainer. The more money you save now, the more you’ll likely have in retirement, and the more likely you’ll be able to enjoy the retirement you want. But does contributing the maximum to your retirement accounts make sense?

Maxing out your retirement accounts generally involves contributing the annual limits set by the Internal Revenue Service for the retirement accounts available to you. Depending on what's available to you, that could allow you to save a significant amount of money across your accounts. However, only about one of every seven 401(k) participants max out their 401(k) contributions.¹ So, while there are merits to contributing the max to your retirement savings, it's okay if you're still working toward it.

What does it take to max out my retirement accounts?

Many people have access to an employer-sponsored retirement plan, often a 401(k) or 403(b), an individual retirement account (IRA) and a health savings account (HSA). Depending on your circumstances, if you're contributing the maximum to all those accounts, that could mean contributing almost $50,000 each year. (See details below.) Some 401(k) plans also allow for after-tax contributions, which may allow you to increase the amount you can put away tax free if you can convert it to a Roth account.

What are the benefits and trade-offs?

Making the maximum contribution has many benefits, but it comes with some trade-offs. With an increased savings rate, you can give your retirement savings an early boost or help you catch up on your retirement savings. When invested, these increased savings have the potential to grow to even greater amounts. You'll also be taking advantage of your retirement account tax savings, and it may provide some flexibility later if you need to reduce your savings rate or retire early.

However, every dollar saved for retirement is one that isn't saved or spent elsewhere. So, to the extent that you have other financial goals, like saving for education, a down payment on a house or even for a big trip, contributing the maximum could take away from those goals.

Should I or shouldn’t I max out my retirement accounts?

A good place to start when maxing out your retirement contributions is to ask if you need to. A financial advisor can help you determine how much you need to save to each by looking at your specific financial situation and goals. Even if you don't need to, you might still want to max out your retirement savings to take advantage of the previously mentioned benefits.  

If you want to max out your contributions but it isn't realistic right now, focus on small, sustainable progress that can help you to one day max out your retirement savings. One strategy that is often helpful is to increase your retirement savings rate by 1% each year until you've met your goal. Nevertheless, if you do decide to max out your retirement contributions, you'll want to have the following basics in order before ramping up your contributions.

Maintain adequate insurance coverage.

Make sure your insurance is sufficient and up-to-date. Having insurance — health, life, auto, home and disability — protects you from the unexpected, helping shield you, your family and/or your assets from financial risk.

Build an emergency savings fund.

Another factor to consider is whether you have an adequate emergency fund. When you don’t have enough cash on hand, even the smallest emergency, like a car or home repair, can put you in a bind. That’s why we recommend keeping three to six months of total expenses at the ready.

Pay off high-interest debt

Debt impacts your finances in diverse ways. While there are benefits to some debt — a home loan can help achieve a homeownership goal and build equity, and an investment in education may increase your income level — high-interest debt tends to be more risky and costly. Before you max out your retirement accounts, we generally recommend paying off your high interest rate debt to save on interest and other fees.

Take advantage of tax benefits

Contributions to your traditional 401(k), traditional IRA and HSA generally lower how much you’ll pay in taxes for the year, and the investments have the potential to grow tax deferred. However, withdrawals from traditional 401(k)s and IRAs prior to age 59½ may be subject to taxes and a 10% IRS penalty. If you have a Roth 401(k) or Roth IRA, your contributions won't lower your current tax bill, but the earnings growth is distributed tax free provided certain conditions have been met. Because qualified withdrawals from Roth and HSA accounts are tax- and penalty-free, each dollar in a Roth is essentially worth more than if it were in a traditional retirement account, which effectively provides Roth and HSA  accounts with a higher contribution limit.

How an Edward Jones financial advisor can help

Your financial advisor can help you understand how much you need to save for retirement and review your accounts, tax situation, income and personal goals to help identify the approach best suited for you.