Don’t Max Out Your 401k Annually

These days, every time I read a blog or some online article where people simply preach about 401k or are celebrating their annual max out of 401k contribution, I… just chuckle. That’s me being polite.


People, please stop blindly echoing and following each other. Do some studying, learning, thinking for yourself. There are certain things you need to consider, keep reading.

First thing first, if your company provides 50% or 100% matching of certain amount or percentage of your contribution, by all means, take advantage of it. Beyond that, perhaps you should re-consider the benefits and the (over)hype of 401k.

Now, pay attention to the points below. For each, take a minute and pause and see if it makes sense. Don’t just take my words for it.

  • The MAJOR premise of using [traditional] 401k is for the delay of income tax so that more of our money can grow until we withdraw. However, at the rate our national debt is going, do you think a bet on having low income tax rate in the future is a smart bet? Especially when income tax rate for low to medium income households are very low currently.
    Update 03/24/2012: A counter to this point would be to use Roth 401k if that’s available in your plan
  • Following previous point, withdrawal from 401k account is taxed at income tax rate, versus, withdrawal from taxable account and only its gain is taxed at capital gain tax rate. If government must raise taxes, which is likely to be increased more? Which is likely to be lower in the future? Seeing the trend of the United States government, the answer is that income tax rate will likely increase more while capital gain tax rate remains lower.

    “But 401k grows with pre-tax money, blah blah blah…” Yes I know. But with 401k, we are trying to plan for a future that is VERY far down the road, and therefore, we should make a more conservative plan. I would rather bet on the a taxable account outside because there is less variables, meaning, I know the taxed principal will be there (I should have a good percetage back to “cash” near “old age”). Better to overestimate than underestimate.

  • Depends on the 401k account management, the chance for shady, kick-back, and “hidden” fees is not negligible.
  • Many 401k accounts do not provide “good” selection of funds.
  • A common argument for 401k is that it’s forced-saving. BUT! Generically speaking, if you need you money to be locked up in order to save, there is a bigger situation about yourself that you need to confront and handle. Namely, responsibility, discipline, foresight…
  • The population is aging. More people are retiring than people joining the workforce. That means likelihood of more people selling (whatever that’s left in the account) stocks and bonds in the 401k than people buying in. This adds more downward pressure against future stock growth. Plus, we have to be cautious with our belief in future growth in general.
  • Lastly, we don’t live forever and can very well die before 60s. I am not sure about locking up all that money, that I cannot access and use without penalty except for some very “dire siutations” (ahem, hardship withdrawal…). There can be good argument against this, but I still think there is value in this thought. Mainly, we are not immortal. Stop living and behaving like we are.

So now you have my skepticism with 401k. Again, if there is matching from your company, get it. That’s “free” money. Otherwise, it would be a good idea to spread things out some in taxable accounts than having full belief and your $$$ in the 401k basket. It’s not that difficult… just following the same allocation in both places. You do have some ideas of your portfolio allocation, right?

Meanwhile, I contribute to my company’s matching. Maxing out my 401k yearly? I’ll pass.

Update: Thanks Meg for pointing out my confusing comments with Roth IRA which is corrected. It is my own decision not to. If interested why I don’t, read comment.

Originally posted 2012-03-24 23:33:23. Republished by Blog Post Promoter

2 Responses

  1. Meg says:

    The one sentence that confuses me is your last – your arguments don’t really apply to Roth IRAs (or even Roth 401ks for that matter). Why wouldn’t you want to max one of those?? Especially in light of the fact that it’s a nice complement (tax diversity wise) to your traditional 401k.

    With a Roth IRA you pay taxes now – at historically low tax rates – and then you never pay taxes on any growth or any withdrawals EVER. Oh, and you can also take out all of your contributions (not earnings) at any time with no taxes or penalties.

    If you’re investing at all (which, granted, not everybody should be doing) and you qualify for a Roth IRA then there’s no good reason to pass it up.

  2. Kin says:

    @Meg, sorry for the confusion. You caught me on that one. My arguments ARE for 401k and not for Roth IRA. Well, there is possibility of changes in tax law that minimize the benefits of Roth in future (income tax is gone but tax on everything else…haha) Well,it’s a weak argument.

    Anyways, not maxing, having Roth IRA is just my own peculiarity. I like to keep things simple instead of having so many accounts. Gives me peace of mind, which to me, trumps everything else. Financial common sense speaking, that is stupid.

    My personal belief is, if we do 50% of the “right” things in life (all aspects of life, not just financial), things will work out in the end. Well, I do, to the best of my awareness, beyond 50% already and so, I try to keep things simple. In Roth IRA’s case, I decide not to have the extra account, because its effect is minimal in terms of what I want as “enough” in my own future.

    Recalling the third last argument, it compliment this “50% idea” in that, and I dare to say, most people who end up in very “messy situation” in their life namely they never do 50% of the things in their life with such attributes (responsibility, discipline, foresight, awareness, compassion, respect…) Anyways, a whole other topic.

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