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Why You Should Refuse to Max Out Your 401(k)


How often have you been told to max out your 401(k) or 403(b)? Well I’m telling you to not even try. Sounds strange doesn’t it? That’s because we have all been told constantly that putting money into your 401(k) is a good idea. Certainly, if you have the option to either put money into your 401(k) or to buy a depreciating asset such as a new car, then I would certainly say you should invest in the 401(k). But, there are quite a few alternatives that I would consider a better option than that 401(k).

Get Your Match

Before you start cancelling your 401(k) investments, take note that I am not telling you to avoid 401(k) investing all together. If your company provides a match on your invested dollars, then I would invest up to that amount. For many, this match amount is 100% on the first 3% that you invest, which would equate to a total of 6% of your paycheck. There is nothing else out there that will immediately double your money instantly like a company match will.

Why Not Max Out the 401(k)?

So the big question you’re asking yourself is probably, “Why is it a bad thing to max out my 401(k)?” I have three answers to this question:

  1. 20110615 - money problems empty pocketsMost people don’t have the means to put in the $17,500 to max out their 401(k) account each year. If they tried, they would most likely be
    ignoring other items that would be costing them more money in the present – like a credit card balance with an interest rate of 17%. The net gain on their extra effort would be negative.
  2. Many rave at this 401(k) investment because of the tax benefits. True, you don’t get taxed on this money initially, but you will at some point – most likely when you need the money most, during retirement. And, based on the way our government is running things, I would say it’s quite likely that we’ll be paying a larger tax percent later in life.
  3. Investing in a 401(k) will handcuff you until the age of 59 1/2. If you decide that you want to invest your money into something else, you will be penalized up to 10% of the withdrawal. That just doesn’t seem right does it? It’s your money and you’re not allowed to do what you want with it!

20110522 - money - staff prairieecothrifterWhat Else To Invest In?

Well if you shouldn’t invest all of your money in your 401(k), what should you invest in instead? Personally, I have invested my money into this website (the initial cost was $44, and don’t worry, I have earned back that money) and continue to benefit from its monthly earnings. More recently, I have been trying my hand at buying and selling cars. A few months ago, I purchased a car for $5,500, fixed it up a little and sold it for $7,000. It’s not for everybody, but it is fun to earn a thousand bucks in 3 months time. I have also invested in my house, which was a steal as a foreclosure. By putting a little elbow grease into it, I have increased its value by more than $40,000. And, within the next year or so, I will be investing in rental properties – multiplexes to be specific.

So here is a summary of my investments:

  1. Company 401(k)
  2. Website
  3. Car Flipping
  4. House Flipping
  5. Rental Properties

Beyond this, I think it is wise to start your own business. I have an idea in the works that will take about 100 hours to set up, but has the potential to earn over $15,000 (which equates to about $150/hr). Do some brainstorming to find out what investments are right for you. Maybe you would like to start a business, or if that seems overwhelming to you, perhaps you could be an angel investor and give an entrepreneur a chance to make it big (for a certain share of their company of course). If their business takes off you could soon be rich!

Would you ever invest in something other than your 401(k)?



My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.


  1. I think I’d have to disagree with you for most situations. I really, really wish I’d maxed out my company retirement plan from day one. It is with Vanguard. The fees are low, and there are excellent choices in funds to choose from. I thought I was smart for contributing 3% to get the match. I was going to pay off my student loans and buy a house with my new salary. Well, we did buy a house, but then got swept up in lifestyle inflation and didn’t max out the plan until recent years. I do agree that if you are paying off high interest debt or if you have another investment idea, it’s OK to use money for that. However, most people are going to use a new salary to buy more stuff. If you can get used to living off the rest after maxing out a good investment plan, you would be much better off. I realize you can’t do this if you make $25K a year, but if you have a decent salary, max that 401K out until you find other worthwhile investments you want to purchase. It’s very hard to go back and max your contribution after you are used to seeing that money every month.

    • Well I think that you said it best Kim. You got swept up with “Lifestyle Inflation.” The whole point of the idea behind not maxing out your 401k is to capitalize on the extra liquid, not to live more luxuriously

  2. I agree that you shouldn’t necessarily max out a 401k plan (get your employer match for sure, but don’t contribute more than that) – but I do think just about everyone should be striving to max out a Roth IRA. That’s $5,500 a year and it is taxed in the same year you earn it, so when retirement rolls around you have a huge fund of money you won’t have to pay taxes on as you withdraw it. Roth IRAs aren’t on lockdown, either. You can withdraw your principle any time without penalty. Although I wouldn’t advise withdrawing any money from your retirement, it does provide a little safety net for anyone concerned about investing a large chunk of today’s income for the future. If anything catastrophic were to happen to you, you would have access to what you contributed to your Roth IRA (just can’t touch the earnings).

    The other ideas – especially rental properties – can be good investments, too. But I think you have to prioritize your 401k contributions (or other employer-sponsored plans) to get the match and contributions to max out a Roth IRA before you start putting money toward other endeavors. Honestly, I would think of flipping cars or houses more of a side hustle or a business that brings in extra income than an investment in themselves. Once you earn it, of course, that extra income can be put into an invested savings account, index funds, or something similar.

    • Thanks for the awesome comment Kali! However, you make it sound like anyone can withdraw money from their Roth IRA at any time – I am almost 100% certain this is not the case. Just like a 401(k), you have to wait until you reach the age of 59 1/2, unless you are removing the money for a certain set of circumstances that are approved by the government.

      Instead of investing this way, I would much rather find myself an investment property that will earn me a continuous return. Plus, I can use this money in any way I choose. By the way – about the car and house flipping, I agree. It’s more of a side hustle than anything. Real estate is my major investment desire.

      • I guess you are correct that the Roth would require a certain set of circumstances. But you can currently ALWAYS withdraw the money you have put into it at any time, tax free. So if you put $15,000 in the past 3 years into it and need that money, you can withdraw it. And as Sam over at Financial Samurai mentioned, the market has earned about 30% over that time, so you could leave about $4,500 in the account and then add more to it as long as you don’t pass the maximum amount allowed.
        Is that in your best interest, most likely not, and I would strongly suggest that you’d try to cover that cost by getting a quick second job, or something like that.

  3. I understand your reasoning Kim, but there are some of us that would like to retire before we are 60 years old. If I put all of my money into my 401(k), there is absolutely no chance for that.

  4. Derek,
    Both you and Kim bring up good points. I think that for most people who might lack discipline and intensity, it would be best to max out a 401(k) and start early in life. That way the money is out of sight and out of mind. You might be one of the rare ones who can be intense so it would make more sense to maintain that control in order to develop some passive income streams and eliminate debt.

    • I agree with you JT. Like I said before, if they are going to take that extra money to buy a brand new car (that will be next to worthless in 10 years), then they should just put their money into the 401(k). But, if they love the game of making money like I do, then they should try their hand at doing something different. It might just allow them to retire at age 35 or 40 instead of 70… 😉

  5. I respectfully disagree.

    Most people are paying at least 15% in income taxes – and more likely much higher. In retirement you can pretty much withdraw around $42,000 before taxes hit – so for the overwhelming majority of people you are effectively avoiding taxes on 401k contributions entirely. In any case most people will be earning much more in income during their careers annually than they’ll be drawing down while retired. If you want tax diversification you can also fund a Roth (though I think it’s a worse decision).
    Second, you can withdraw earlier than 59 1/2 using SEPP. And you can withdraw out of a Roth once the deposit has been in for five years. Many frugal early retires plan to draw down on their 401ks, convert what they don’t need into a Roth and then withdraw that in five years (sort of like a bond/CD ladder).
    Don’t get me wrong, if you have available cash to invest in yourself, you should. And you should always pay down high interest debts before saving, but a 401k is a way yo supercharge your net worth by deferring/avoiding taxes and for many people by getting free money in the form of matching.

    • Sounds like we’re kind of on the same page Chris. However, it sounds like you are planning to be poor when you’re older. When I’m 60 years old, I plan to make more than when I was in my 40’s. After all, through constant investments, one should be able to increase their income every year, even when they’re older. I don’t mind paying taxes now. They are cheap (relative to what I believe is coming in the future) and they allow me to invest my money in the manner that I want. Thank you for the comment Chris. I always love hearing perspectives that are different from my own! 🙂

  6. Right there with you, especially on point 2.

    There’s no way of knowing how the coming decade or two will play out as the results of quantitative easing slowly settle over our economy like an iron comforter. I’d much rather have my money in a cash flow producing asset such as a rental property, or even a business, than sitting “idle” in the stock market via a retirement fund where it’s easily targetable when Social Security, the ACA or some other government shenanigans finally implodes.

    You may be thinking I’m a bit nutty. Better do the math on what $85,000,000,000 a month in quantative easing (e.g. new debt) does to a country with a GDP of $15,000,000,000,000 and already $17,000,000,000,000 in debt.

    When you find yourself in a hole, the first thing you do is stop digging.

    • Great points Jack. Ever think about doing business overseas to avoid the meltdown here?

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