Should You Put More in Your 401(K) Than You Need to Get the Employer Match?

You should always invest enough in your 401(k) to get an employer match. But should you put more money into your 401(k) or do something else with it?

Colorful letters spelling out 401(k) next to a piggy bank.

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Many companies offer a 401(k) account as part of their workplace benefits package. A 401(k) is a retirement savings account employees can contribute to with pre-tax funds. Money is taken directly out of the paychecks of participating employees and put into the 401(k) account. Employers usually, but not always, match at least some portion of the employee's contributions. The money is invested and grows, ideally until it's needed to provide income when the employee retires.

If you have a 401(k) at work and your employer offers a match, you should always invest enough in the 401(k) to claim the full match. If you don't, you're giving up free money. You can't afford to give up free money and should take advantage of the help your employer provides to ensure you save enough for retirement.

While you should always invest enough to get the match, you'll have a decision to make once you've done that. The maximum 401(k) contribution you're allowed to make is $19,000 in 2019, or $25,000 if you're over the age of 50 and eligible to make up to a $6,000 catch-up contribution. Chances are good your employer will cap your match far below the maximum contribution.

If you're able to invest more in your 401(k) than necessary to get the employer match, should you do so? The answer depends upon your situation.

Are you eligible to invest in other tax-advantaged retirement accounts?

Claiming a tax deduction to save for retirement is always smart. But, you don't necessarily have to invest in a 401(k) to get a tax break. You could invest in an IRA or a health savings account (HSA).

If you have the money to max out all your tax-advantaged retirement accounts, including your 401(k), HSA, and IRA, you should do that. But, if you have more money to save for retirement than the amount needed to earn the employer match and you can't max out all your accounts, you'll need to determine if some of your money should go into a tax-advantaged account that isn't a 401(k). The catch is, there's no guarantee everyone can invest in these accounts.

There are different kinds of IRAs, but contributions are made with pre-tax money for all but a Roth. And you're taxed on withdrawals, just like with a 401(k). However the maximum contribution is just $6,000 in 2019 or $7,000 with catch-up contributions. There are also income limits for deducting contributions if you or your spouse have a workplace retirement plan. The deduction starts phasing out at $64,000 in income for single filers. For married filers, it starts phasing out at $103,000 if you have a workplace plan or $193,000 if your spouse does.

HSAs are meant to help save for healthcare, as you make contributions with pre-tax funds and aren't taxed on withdrawals used to pay medical expenses. But, they can be used as retirement accounts because you can take money out for any purpose after age 65 and pay ordinary income taxes just like with a 401(k). However, you can only contribute to an HSA if you have an eligible high-deductible health plan and the annual contribution limit is $3,500 for a solo HSA or $7,000 for a family HSA.

If you can't contribute to these other tax-advantaged retirement accounts, a 401(k) is your only option for a tax break on retirement savings, so contribute every dollar you can to it. But, if you can, consider these other factors below to decide if all your retirement savings belong in your 401(k) or some should go to these accounts instead.

Would you rather contribute to a Roth IRA?

You'll also need to consider whether you'd rather take your tax break in retirement or now, while you're working. If you'd prefer to invest with after-tax dollars but get tax-free growth, you may want to put some money into a Roth IRA instead of investing more in your 401(k) than necessary to get the match.

Roth IRAs have many benefits. You can take money out without paying taxes as a senior. And you don't have to take required minimum distributions, unlike with a 401(k) or traditional IRA. If you don't want to be forced to withdraw funds from your retirement account in accordance with the government's rules or you think you'll be in a higher tax bracket as a senior than you are now, putting money into a Roth rather than maxing out your 401(k) makes sense.

Does your 401(k) have high fees?

Many 401(k) plans charge fees for managing assets. According to one 2018 report from BrightScope, the average total plan cost among all plans in 2015 was .88% of assets. However, some plans charged as much as 1.38% of assets.

Fees undeniably eat into your returns and make saving way harder. If you're charged a .5% fee, you'd need to invest around $575 more per year to end up with the same retirement nest egg compared with paying no fee at all. You'd lose out on around $71,000 due to fees. And it only gets worse. If you're charged a 2% fee, you need to contribute more than $2,600 extra per year to end up with the same amount of money and would miss out on almost $240,000 due to the fees you're paying.

You can find plenty of brokerages offering IRAs with no account fees, and there are even some fee-free HSAs. If you're able to open one, it makes sense to put your retirement money there after contributing enough to max out your match -- rather than putting the extra into your 401(k) and paying fees on that money too.

Are you limited in your investment options?

When you invest in a 401(k), you'll usually have a limited number of investment options. Many 401(k)s don't allow you to pick individual stocks, or allow you to invest only a small amount of your money in individual stocks. And many plans offer only limited options for mutual funds or ETFs.

If you want more freedom and flexibility -- or if investments in your 401(k) are limited to funds that charge high fees -- this is another situation where you should invest only enough to earn the match. Put the rest of your retirement money into an IRA where you can buy whatever investments you want.

Invest as much as you can for retirement

If you have enough money to max out a 401(k) and other retirement accounts such as an IRA or HSA, do that. But, if you have to choose, make sure to consider all of these factors so you can make the most informed choice about where your retirement money should go.

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