Should You Always Max Out Retirement Accounts?

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Making the maximum yearly contribution to accounts such as 401(k)s, IRAs, and even HSAs, is a great way to build future wealth. But just because you can, should you?

In most cases, the tax benefits and power of compounding make it worth it.

However, they’re some things to consider.

Debt, lack of emergency savings, and large purchases are all valid reasons to contribute less to retirement.

Let’s go over some scenarios when you should and shouldn’t max out your retirement accounts.

When You Should Contribute the Maximum

You don’t owe any high-interest debts. (Credit cards, auto loans, etc.)
You have an emergency fund with a minimum of 6 months’ expenses saved up.
You do not plan to make any large purchases soon (down payment for a home, new vehicle, etc.)

If you check all three of these, you should strongly consider maxing out all of your retirement accounts. You’ll reap tax benefits now, and your future self will be more likely to retire comfortably.

When You Shouldn’t Contribute the Maximum

You have debt with an interest rate higher than 5%.
You do not have an emergency fund saved up.
You are trying to save for a large purchase such as a home, new vehicle, or medical expense.
You simply prefer to spend your money on something else.

If you have high-interest debt, it’s always better to pay that down or off with any excess cash. After your debt is paid and your emergency fund is built, you should focus on investing.

Retirement Contribution Limits

So, what is the maximum you can contribute per year? Here are the contribution limits as of 2021:

401(k) $19,500.00
IRA $6,000.00
Roth IRA $6,000.00
Health Savings Account (HSA) $3,600 Self-only $7,200 Family

If you are 50 years old and older, there is a catch-up contribution of $6,500 for 401(k)s and $1,000.00 for IRAs.

The maximum applies across multiple accounts. So, if you have more than one IRA, the limit is still the same.

What to Do After Maxing Out Retirement Accounts

If you have met the maximum contribution limit for all your accounts, your next step is to open a taxable investment account. This is done through any online broker like Schwab, Vanguard, Fidelity, etc.

After opening a taxable account, you can start buying index funds or individual stocks. There is no limit on how much you can invest! You will, however, be taxed on any short-term and capital gains.

There are alternative investments, such as precious metals and real estate, that you should consider as well.