2011 was my first year of making contributions to a 401k. I started my current job back in August of 2010 and began contributing to get the company match since I started. This has given me a year and a half of consistent contributions. Before that there was one other time I contributed to this form of retirement account and that was around five years ago. As part of a long line of consistently bad financial decisions, I cashed it out when I left the job.
For the last several months I’ve been weighing the benefits of maxing the 401k versus continuing to contribute enough to get the company match. This has been on my mind for a while and I lean towards not maxing it out. If you’re reading this blog there is a good chance you spend a good deal of time thinking about money management decisions so I thought I would get a second opinion from you guys. Before you can make a suggestion it will be helpful to know why I have decided not to max it out, then you can decide if you agree with my decision or think I should reconsider.
There are two main reasons I have not maxed my 401k. First I don’t think I will benefit (much) from the tax break. Since this is a popular reason for supporting the decision to contribute the max if you can it seems reasonable to start with it. By working overseas I already earn a tax exemption for income up to 92,500.00. So there is not much benefit from maxing. However, and I just thought of this, I do have to pay state tax. If I do contribute the max that would reduce my taxable income, right? Hmmm…. something to ask the accountant about.
Second, I’m not crazy about the investment options offered in this account. It’s a target date fund through Vanguard and as such gives me exposure to indexing and dollar cost averaging through the monthly contributions with low expenses associated with the funds. I think I may be better off investing in my taxable account and reaping the reward of capital gain and dividend income. For this to work I need to be earning a high enough return to offset the taxable events that are recorded in my taxable account. Can I do this? Who know’s. I only have one year of data to refer to so making a claim one way or another is rather arbitrary.
Just to be clear, it’s not about whether the money will be invested, it’s about where.
Leave me a comment and let me know what you think. What would you do?
The Stoic Investor 
In the same boat as you. Started a 401k for the first time in 2011. I put in the the minimal amount to meet the matching contribution. After that I aim to max out the IRA then any money left over will go to the brokerage account and not maxing the 401k. The reason is 100% down to the investment options available. I feel I can make my money work better outside the 401k in my other investment vehicles.
Hi IRF- Thanks for commenting. I agree with you, the options are rather sparse in some of these 401k accounts. I think that is a disgrace, if they want us to manage our retirement accounts we should at least have good options available to us. Kudos to you on taking the max, a lot of people don’t even do that.
How long do you plan on being at your company? If you don’t plan on being there long, I would max it out because once you’ve left, you can move the funds to a Rollover IRA and do whatever you want with it. So really, you’re buying the contribution room, rather than the specific funds that are there, since $17,000 plus employer match is far more contributions than you can get in any other tax-deferred vehicle.
I am a fairly disciplined saver, but I really like the money disappearing from my paycheck to the 401(k) every month. It just makes it easier to know where it’s going already and not have to do it manually. I am maxing my 401(k) out, but I like index funds and we have enough good ones for me to happy (Vanguard 500 Index Fund, Vanguard Total International Stock Index Fund, and Vanguard Total Bond Market Index Fund).
I will be here at least three more years, that will make me vested in the pension. I may stay longer though, I kind of like it here. I do plan on rolling it over into an IRA whenever I do leave. I guess my big sticking point is deciding if it matters what account the money goes into. I will invest the money in the rollover IRA the same way I would now. Deciding on how big a difference the tax drag is on having it in a taxable account is also a factor to consider. Clearly I need to do a lot more research. Thanks for the suggestion!
Stoic, I’m not a fan of these accounts. They really aren’t a free lunch. Consider, if you could take your match as income would you do it and invest outside? I think many people would.
Being what it is, you could invest up to the match and put the money in cash (stable value or money market). Then save the rest of your money in a Roth or taxable account.
Unless you are in the 25% bracket or higher, I wouldn’t max it out.
Hi SFI– Thanks for the suggestion. I think the primary concern is that the money is invested (which it is) the secondary consideration is where it goes. I’m thinking that the tax sheltering benefits of storing that money in the 401k may prove to be beneficial. Right now even with maxing the 401k out I would still have plenty of funds to put to use in my taxable account. I’m still on the fence with what I will do, but I appreciate the opposing views that you and Leigh share. Thanks guys!
Personally I contribute the minimum to get the full match, but nothing more. I only have 5 choices available to me + some target date funds. I’m not a big fan of mutual funds. I plan on rolling this over to an IRA when I retire so I can have full control. I like having choices, especially when I spot something that is obviously under valued from time to time.
However if you are close to the next tax bracket, it may be worth contributing more to avoid paying Uncle Sam. The money is better off in your 401k than in the hands of the government.
Another consideration is your timeline for retirement. If you plan to retire early you’ll want to beef up your taxable account and ROTH IRA so you can access funds before age 59.5 without penalties.
There are a lot of variables.
Thanks for stopping by CI! You raise some excellent factors to consider. Although I’m not really crazy about maxing out, I’m beginning to lean that way, here’s why. My thinking has been oriented to the sort term, what I can do now with the money. What I don’t think I’ve been considering enough is the positive impact that stashing away 17k a year tax sheltered will have in terms of compounding over the years. Yes, I’m not crazy about the options that have in the 401k for investing, but if it allows me a place to store the cash until later, then letting it grow tax free is worth something. When/if I do leave my current job and can roll it over to an IRA and invest how I want allowing the gains to grow tax free until I take distributions 20+ years from now. I’ve often considered the short term costs of maxing it and what I thought would be the immediate benefits of putting that money to work elsewhere vs. what it is costing me in the long term by not taking advantage of the the tax sheltered account. I’m beginning to focus on the latter.
I dabbled a bit thinking I wanted to do early retirement, but I’m now leaning towards FI as being my main goal. As you said, placing the funds in the 401k will take me a bit longer to reach FI, but it may be worth it. Thanks for the comment, you guys got me thinking about this a lot and that is good….