What to Do If You Max Out Your 401k

Saving for retirement is a primary financial objective for many individuals, offering a path to long-term security. A 401(k) plan is often central to this strategy, providing a structured way to accumulate funds. These employer-sponsored accounts help grow savings over time. Understanding how to utilize these plans, including contributing the maximum allowable amounts, is a key step in retirement planning. This helps individuals build a financial foundation for their later years.

Understanding 401(k) Contribution Limits

“Maxing out” a 401(k) means contributing the highest amount allowed by the Internal Revenue Service (IRS) in a given year. For 2025, the primary annual employee contribution limit is $23,500. This limit applies to the total amount an employee can defer into their 401(k), whether traditional, Roth, or a combination. This $23,500 limit also applies across all plans if an individual participates in multiple 401(k)s through different employers.

Individuals aged 50 and older can make additional “catch-up contributions.” For 2025, this is an extra $7,500, bringing the total employee limit for those 50 and over to $31,000. A specific provision under SECURE 2.0 allows an even higher catch-up contribution for those aged 60-63, increasing it to $11,250 in 2025 if their plan permits. This raises their total capacity to $34,750 for the year.

Employee contributions to either a traditional (pre-tax) or Roth (after-tax) 401(k) count towards these limits. The distinction is in their tax treatment, not how they apply to the contribution ceiling. Employer contributions, such as matching or profit-sharing, are separate from employee limits. While employer contributions have an overall plan limit when combined with employee contributions, they do not reduce an employee’s ability to max out their own deferrals.

Tax Implications of Maxing Out

Contributing the maximum to a 401(k) influences an individual’s tax situation, depending on whether contributions are made to a traditional or Roth 401(k). Traditional 401(k) contributions are pre-tax, deducted from gross income before taxes. This reduces current taxable income, potentially lowering adjusted gross income (AGI) and immediate tax liability. Investment growth within a traditional 401(k) is tax-deferred, with taxes paid on earnings only during retirement withdrawals.

In contrast, Roth 401(k) contributions use after-tax dollars, providing no upfront tax deduction. A primary benefit of the Roth structure is that qualified withdrawals in retirement, including contributions and earnings, are entirely tax-free. To be qualified, the account holder must generally be at least 59½ years old and have held the account for at least five years.

Maxing out a traditional 401(k) is advantageous for individuals in higher tax brackets, as the immediate tax deduction leads to substantial current tax savings. This allows money that would have been paid in taxes to grow within the retirement account. Conversely, maxing out a Roth 401(k) benefits those who anticipate being in a higher tax bracket during retirement. Paying taxes now avoids future taxes on a potentially much larger sum.

Where to Invest After Maxing Out Your 401(k)

Once an individual has contributed the maximum to their 401(k) for the year, other tax-advantaged and taxable investment vehicles can be considered. These options offer diverse benefits and flexibility for long-term financial growth.

Individual Retirement Accounts (IRAs) are a common next step, offering similar tax benefits to 401(k)s but with different limits and income restrictions. For 2025, the IRA contribution limit is $7,000, with an additional $1,000 catch-up contribution for those aged 50 and over, totaling $8,000. Traditional IRA contributions may be tax-deductible, leading to tax-deferred growth, but deductibility can phase out based on income if covered by a workplace plan. Roth IRAs, funded with after-tax dollars, offer tax-free growth and qualified withdrawals. However, direct contributions are subject to modified adjusted gross income (MAGI) limitations. For 2025, single filers must have a MAGI under $150,000 for a full contribution, and joint filers under $236,000, with phase-outs above these amounts.

For high-income earners exceeding direct Roth IRA contribution limits, a “backdoor Roth IRA” strategy can be used. This involves making a non-deductible contribution to a traditional IRA and then converting those funds to a Roth IRA. While there are no income limits for converting a traditional IRA to a Roth IRA, this strategy is for those who cannot contribute directly. Any earnings accruing in the traditional IRA before conversion would be taxable, as would a pro-rata portion of any pre-tax IRA funds if an individual holds other traditional IRA accounts.

Health Savings Accounts (HSAs) are another option for those with eligible high-deductible health plans (HDHPs). HSAs offer a “triple tax advantage”: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free. For 2025, the HSA contribution limit is $4,300 for self-only coverage and $8,550 for family coverage, with an additional $1,000 catch-up contribution for individuals aged 55 and over. To qualify, an individual must be enrolled in an HDHP meeting specific deductible and out-of-pocket criteria. HSA funds roll over year to year, providing a long-term savings vehicle for medical expenses in retirement, or for any purpose after age 65 (though non-medical withdrawals would then be taxable).

Finally, a taxable brokerage account offers unlimited contribution potential and flexibility, without the specific limits or withdrawal restrictions of retirement accounts. Funds contributed are after-tax, and investments grow with capital gains and dividends subject to taxation when realized or received. Long-term capital gains, from assets held over a year, are typically taxed at lower rates than short-term gains or ordinary income. While lacking retirement account tax advantages, brokerage accounts provide liquidity and control, making them suitable for goals requiring access to funds before retirement.