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Investing 401(K) Retirement

To max or not to max: Maxing out your 401(k) in your first year

Maxing out your 401(k) each year can be daunting. Let’s examine the pros and cons of maxing out your retirement contributions.

Car labeled "me," driving away from an exit marked "Saving for retirement" towards an exit marked "Literally anything else"

Ah, that new job excitement. It’s like going back to school after summer break, but with more money. It’s onboarding time with HR and you need to select an amount to put into your 401(k) plan. Should you max out your 401(k) contributions? You’ve heard it’s a good idea, but are there better things to do with your hard-earned cash?

What are the 401(k) contribution limits in 2022?

Let’s start with the easy numbers: This year you can contribute a maximum of $20,500 to your 401(k) (and an extra $6,500 for our boomer friends over the age of 50). That’s only your own contributions, employer contributions don’t get included in that total. If you put in the full allowed amount, you’re maxing out your 401(k). The limit is across all jobs during the year, so if you switch jobs, sorry, you don’t get to reset that number.

If that sounds like a lot of money to you, that’s because it is a lot of money. Especially in a retirement account where you won’t see it for another 30 years or more. If this is giving you a panic attack, take a deep breath and keep reading. 

4 reasons not to max out your 401(k) in your first year of work

When should you avoid maxing out your 401(k) in your first year of work? There are a few good excuses to pass on full contributions when you’re starting out. 

1. Your employer doesn’t offer a match

You work for a company that doesn’t provide a match when you first start (or ever). If that’s you, I’ll pour one out for you on my next bar crawl. Employer contributions are what make 401(k)s so awesome. It’s when the employer puts a certain amount of money into your account each time you do. No match = less awesome. Some companies make you wait a year before they start matching contributions. If that’s the case, there may be better ways to save your money until that match kicks in.

2. Your vesting schedule sucks

Vesting refers to how long you must be with the company to take your employer contributions with you when you leave. Your contributions are always yours, but the employer’s contributions are often tied up. Every company is different. Some companies have immediate 100% vesting—those are the good ones. Others will let you have a percentage each year that you stay with the company, such as 25% a year, until you’re 100% vested. If it’s your forever job, great! But if you think you’ll only stay for a year or two, best to read the fine print on your vesting schedule.

3. You have no cash in the bank 

I get it, you spent your summer eating your way through Europe. Now you’ve got $10 in your bank account and only bottled water in your fridge. If this sounds like you, focus first on putting away cash for emergencies before worrying about your retirement. Got credit card debt? Same story—get that paid off ASAP. 

4. You’ve got other things you want to save for  

You’re thinking about moving out to the suburbs in the next three to five years and you need a house down payment. You’ve decided that this is finally the year you make it to Burning Man and you need money for, uh, camping gear. Can’t save for your goal along with maximizing your 401k contributions? Go ahead and split the difference. Save what you can in your 401(k) while putting away some cash for your other goals. Then, increase your retirement savings after you reach those goals.  

3 reasons you might max out your 401(k) in your first year of work

Match? Check. Money in the bank for emergencies and other goals? Check. Still not sure what to do? Here are a few reasons you might want to max out your 401(k). 

1. You won’t miss that money

Maybe you’re making $150,000 in your first year and still living with your parents. Maybe you’ve got a trust fund and this job is for funsies. If you think you can put some money into a 401(k) right now and still have a good amount of cash left over, then do it. Your future self will thank you. 

2. You want to retire as soon as humanly possible

You’ve already figured out that this work thing sucks and it’s not for you. Let me introduce you to the FIRE movement: Financially Independent/Retire Early. In a nutshell, it means saving aggressively so you can retire sooner and enjoy your life on your own terms. This means cutting expenses and using several types of savings strategies including, you guessed it, maxing out your 401(k) contributions. 

3. You want to reduce your taxes

Want less of your paycheck to go to Uncle Sam? Most 401(k) contributions are pre-tax and reduce your taxable income now, although once you start taking money out in retirement, the government will still get its cut (womp womp). So, maxing out your 401(k) now can be a good strategy for shrinking your current tax bill, as long as you expect your tax rate to be lower in retirement. 

How much should I try to contribute to a 401(k) in my first year of work?

If you can afford to do one thing, contribute enough to get your employer’s match. This is part of your compensation package and skipping it means you’re leaving money on the table. Read your plan details and go get them dollar bills, y’all. 

What’s the point, anyway?

The best way to save for retirement is early and often, thanks to the power of—cue fairy dust—compound interest. Toss in free money from your employer and your 401(k) is one of the best vehicles for retirement savings.