Should You Max Out Your 401(k) Contribution?

Andrew Weber is a senior director of Planning Philosophy, Research and Guidance at Northwestern Mutual.

You’re putting away retirement savings in your 401(k), but you might wonder whether you’re contributing enough. Traditional 401(k)s are great because usually you can put money in without paying any tax on those dollars when you contribute them. Because of the tax benefit, there’s a limit on how much you can put in every year. If you’re not maxing out the amount you can contribute, you may be wondering if you should do more. Here you’ll get some pointers about your contributions.

How much can you contribute before you max out your 401(k)?

In 2025, the 401(k) contribution limit—the most you can put in without a tax penalty—is $23,500 if you’re under 50. It’s $31,000 if you’re 50 or older (except for those aged 60-63, whose limit is $35,250).

And remember, that’s just the amount that you can contribute without penalty. So, if your company matches, that amount doesn’t count toward this maximum. The total that you and your company can contribute is $70,000 each year if you’re under 50. It’s $77,500 if you’re 50 or older (except for those aged 60-63, whose limit is $81,250).

Keep in mind that total contributions cannot exceed your annual compensation at the company.

How much should you contribute to your 401(k)?

It depends on your monthly cash flow, which you can think of as your monthly budget. If you have trouble meeting your fixed costs, all the digital discount codes in the world aren’t likely to help you max out your 401(k) and keep your fridge full. So it’s probably better to save a more reasonable amount for now. Even if you start with 3 to 5 percent of your income and slowly increase that over the years, saving something is better than saving nothing.

A good starting point is to look at your employer’s match. Your HR representative may be able to help you find the details. The employer decides how and when it will make its contributions. On average, the employer’s match is between 4 and 5 percent of your salary. If the company you work for offers a match, strive to contribute enough to get the most you can out of it. Not doing so is like passing up “free money.”

You might be able to have money automatically moved from each paycheck into your 401(k). Your HR representative can help you find the right form to fill out. This might help you stick to your savings goal because the money won’t be in a checking account (where it’s easier to spend).

When your company contributes to your 401(k), it doesn’t always mean that money immediately becomes yours. You might have to wait for it to “vest.” Then it officially becomes a part of your retirement portfolio in a few years.

Do 401(k)s have catch-up contributions?

In the year you turn 50, you’re able to begin making added contributions, called “catch-up contributions.” If you couldn’t put away the maximum in your younger working years, you can still add a lot to your retirement savings. It’s a chance to give your account a boost without tax penalties.

Is there any reason to not max out a 401(k)?

When deciding how much to contribute, it’s a good idea to work with a financial advisor. They can help you look at all your priorities. You might need to work toward getting out of debt or building up your emergency fund to get through a tough spot. The right house for you might hit the market, and you quickly need the money for a downpayment. Or maybe you need to protect your family with more life insurance or disability insurancehttps://www.northwesternmutual.com/disability-insurance/. These are things you might need to prioritize before you max out your 401(k) contribution. They are also situations where an investment account that’s separate from your 401(k) may be useful, depending on your other short-term goals.

While a 401(k) can be a great retirement savings vehicle, it might be beneficial to diversify your investments. You can consider other financial tools with different advantages.

You should also consider debt you’re currently paying off, the age at which you want to retire and collect Social Security along with what a fulfilling retirement looks like for you. If you plan to retire early at 55 and spend the rest of your days traveling the world, you’ll need to save up a lot of money. If you’re fine with packing up your desk at age 70 and lying in a hammock while you read mystery novels, you may not need to save as much.

And believe it or not, some people in higher income ranges might end up saving more than the ideal amount in a 401(k). This could cause problems in retirement, when the required minimum distribution puts them at a tax disadvantage.

The bottom line: How much should you have in your 401(k) when you retire?

In the end, how much you need for retirement comes down to percentages: If you’re planning to have an average retirement, financial experts typically recommend that you save between 10 percent and 20 percent of your income toward your retirement. That means if you make $50,000 a year, you may not need to max out your 401(k) contribution (because that would be way more than 20 percent of your pay). But if you make $200,000, it's only about 10 percent of your salary. So, to save beyond 10 percent of your income, you might need to max out your 401(k) and talk with your Northwestern Mutual financial advisor about additional options.

Your advisor can look at your entire financial picture and point out blind spots and opportunities.

Those opportunities could include:

• An individual retirement account (IRA), which gets tax treatment similar to a 401(k).
• A Roth IRA or Roth 401(k), for which you pay tax today rather than getting a tax break when you make contributions.
• Investments, such as a brokerage account, which give you flexibility.

• The cash value of permanent life insurance¹, for the dual purpose of protecting your family and supplementing retirement income.

The right combination of financial tools really comes down to what’s best for you. That’s why your advisor will spend time getting to know you and asking deep questions about what’s important to you.

All investments carry some level of risk, including the potential loss of principal invested. No investment strategy can guarantee a profit or protect against loss.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER^®, and CFP^® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.)