Read this before maxing out your 401(k) in 2023

(Maurie Backman)

For almost all of 2022, consumers have had to deal with sky-high living costs. That forced many people to cut back on pension contributions or even stop altogether.

But the pace of inflation has slowed in recent months, and the hope is that it will continue to do so in 2023. That could make financing a pension plan more feasible. And if your financial situation really improves in the new year, you may find yourself in a position to make the most of your employer’s 401(k) plan.

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At first, that may seem like a good idea. But before you max out your 401(k), you might want to think about whether that plan really meets your needs.

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There could be a better place for your money

While saving into a 401(k) is fun and convenient — your contributions are deducted directly from your paycheck, so you don’t have to think about it — there are certain pitfalls you may encounter if you choose to save into the plan from your employer.

For starters, your 401(k) may be full of fees. Some of these can be avoided by choosing the right investments, such as choosing index funds over mutual or target date funds, which tend to have higher expense ratios. But there are administrative costs associated with 401(k)s that can eat into your returns. If those are hefty on your employer’s plan, you may want to put your savings in an account that doesn’t charge as much.

Then there is the question of how you will invest your money. You generally cannot choose individual stocks in an employer-sponsored 401(k). If you’re more of a hands-off investor, that might not be a problem. But if you’re someone who knows the market and understands how to analyze companies, those are skills you might want to put to good use. In that case, you’ll find that an IRA is a better choice for your retirement savings.

An IRA allows you to hand-pick stocks and costs are usually lower. Also, not every 401(k) plan includes a Roth savings option. But as long as you meet the income limits, you can choose to put money into a Roth IRA and enjoy the benefits of tax-free investment gains and retirement withdrawals, among other benefits.

Don’t rush to max out your 401(k).

Maximizing your 401(k) may seem like the smart thing to do in 2023, especially if you’ve recently fallen behind on retirement savings. But before you go down that route, think about how happy you really are with your 401(k). You may find that an IRA works better for you.

That said, it’s always a good idea to contribute enough money to your 401(k) to claim your employer match in full, assuming you’re entitled to it. That’s free money you don’t want to give up. But once you’ve found that match, you shouldn’t feel compelled to stick with your employer’s 401(k) just because the option is there.

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