Personal Finance

I can afford to contribute 15% to my 401(k) — but I'd rather contribute less. Is that foolish?

Christy Bieber

Published: December 17, 2024 6:30 am

Key Points from 24/7 Wall St.:

• Investing in a 401(k) is a simple way to save for retirement. 
• You should invest enough in your 401(k) to earn your full company match when possible.
• Once you’ve maxed out your match, there may be other places to put extra money. 
• Also: Is Your 401(k) optimized for your retirement plans? (Sponsored)

Contributing to a 401(k) is often billed as a surefire path to building wealth, with most experts recommending socking away money in this workplace retirement plan. One Reddit poster, however, isn’t convinced that a 401(k) is the best place for all of his funds to go. The Redditor commented that he could afford to contribute 15% to his 401(k) but didn’t really want to, preferring instead to put more money into a brokerage or savings account. 

The big question is, would it be foolish not to deposit the full amount that was affordable into a 401(k)? And the answer may surprise you. 

Maxing out your 401(k) isn’t always the best move

With so much emphasis on 401(k) contributions, it probably seems strange to hear that you shouldn’t always put every dollar you can into this account. But, there are actually some very good reasons to diversify.

First and foremost, most 401(k) accounts don’t have many investment choices. FINRA reports most plans offer between 8 and 12 choices. Some of these investments may have expense ratios that are on the higher side, such as target date funds. Your plan might also have administrative fees as well.  When you pay fees on your retirement investments, this eats into your returns and leaves you with less. 

Depending on what types of plans your workplace offers, you may also have just one choice: a traditional 401(k). These accounts provide a tax deduction in the year of your contribution, but withdrawals are taxable — and you usually can’t take money out until 59 1/2 without incurring penalties. 

Because of these downsides, you may want to put at least some of your invested money into:

• A taxable brokerage account that you can access early
• A Roth IRA that defers your tax savings until retirement
• A Roth or traditional IRA with more investment choices
• An HSA that comes with a triple tax break
• A high-yield savings account for emergencies or short-term needs  

If you don’t have enough money to contribute 15% of your income to a 401(k) and do all these other things, then investing every dollar you can — at the expense of these other options — may not be the best choice. 

How much should you put into your 401(k)?

When deciding how much of your money should go into your 401(k), there’s a simple question to ask: How much is your employer match?

If your employer matches a portion of your contributions, you should almost always put enough money into your account to earn the full amount of that match. Otherwise, you are leaving money on the table that comes to you risk-free and, depending on how your match works, that could provide as much as a 100% return on your investment. 

In the case of the Reddit poster who asked the question, the poster actually said that the company matches 25% of all contributions, so in this particular instance, the Redditor most likely should actually put the full 15% of income that’s affordable into the account — unless he has no emergency savings or a lot of high-interest debt to pay. 

For most people, though, a match is more limited. The company might, for example, match 50% of contributions up to 4% of your earnings — in which case you should invest a minimum of 4% of your earnings before considering a switch to another tax-advantaged retirement account.

Of course, deciding how to allocate your assets is a very personal choice. While it’s a good rule of thumb to try to claim all matching funds, you may also want to talk with a financial advisor if you aren’t certain how to balance competing priorities. That way, you can make the best choice for you so you can have the financial security you deserve now and in the future.