Since their inception in 1978, 401(k) plans have become one of the most popular tax-advantaged investment vehicles that Americans use to save for their retirement goals. For good reason, they are the foundation for many investors’ retirement strategy.
However, not all investors take full advantage of all the benefits that these employer-sponsored savings plans can offer. We are here to help you make your 401(k) work for you.
As you evaluate how to maximize your 401(k), here are actions to consider:
In this article:
- Take full advantage of your employer match
- Use your contributions to lower your taxable income
- Contribute to the maximum limit
- Save after-tax dollars in a Roth 401(k)
- Consider a mega backdoor Roth IRA
- Make sure your old 401(k) plans are working for you
- Routinely review your investments
- Avoid early withdrawals
- Questions to discuss with us
1. Take full advantage of your employer match
As a form of compensation, many employers will match the money that an employee contributes to their 401(k) up to a certain amount. This contribution from the employer is known as an employer match and, if available to you, it’s a benefit you’ll want to take full advantage of to maximize your 401(k).
Action to take: Make sure you’re contributing enough to reach your full employer match, and work with your spouse/partner to do the same. While you’re reviewing your contributions, be aware of vesting schedules. Many companies require employment for a certain period before the matches are 100% yours.
2. Use your contributions to lower your taxable income
You can fund a traditional 401(k) account with pretax dollars. And because your contributions are withdrawn from your paycheck before you’ve paid any taxes, your taxable income will be lower, thus potentially reducing the federal taxes you owe for the year. (For example, if you earn an annual salary of $85,000 and you contribute $10,000 toward your 401(k), your taxable income will be reduced to $75,000 for the year.) Moreover, your contributions grow tax-deferred in a 401(k) account.
Action to take: Consider how your 401(k) investments can strategically help you save on your taxes for the given tax year.
3. Contribute to the maximum limit
There are IRS limits on how much an employee can contribute to their 401(k). For 2025, the annual deferral limit is $23,500 for those under the age of 50, $31,000 for those age 50+, and $34,750 for those ages 60-63. If it’s feasible for your situation, contributing the maximum amount is a goal worth striving for. These thresholds increase over time, so it’s important to keep track of these limits to capture additional retirement savings. (Both pretax and Roth contributions count toward this limit.)
Action to take: Consider increasing your contributions to meet the IRS limit as maxing out your 401(k) can pay off in the long run. If this isn’t possible, consider increasing your contribution percentage each year; many 401(k) plans allow you the option of setting an automatic annual increase.
4. Save after-tax dollars in a Roth 401(k)
If it’s available as part of your 401(k), you may be able to save after-tax dollars with a Roth 401(k), which can help diversify how withdrawals are taxed. Because you have already paid taxes on contributions into a Roth 401(k), withdrawals will be tax-free if you meet a five-year holding requirement and are at least 59½ years old. However, you’ll owe ordinary income taxes on withdrawals of 401(k) funds that are saved pretax.
Action to take: If eligible, consider diversifying the taxability of your 401(k) investments through the use of a Roth 401(k).
5. Consider a mega backdoor Roth IRA
Some 401(k) plans allow after-tax contributions up to $70,000 for employer and employee contributions ($77,500 for age 50+, $81,250 for ages 60-63). This higher amount includes the $23,500 deferral limit ($31,000 for age 50+) that applies to pretax or Roth contributions.
A mega backdoor Roth IRA then rolls these after-tax assets over to a Roth IRA. If your plan allows this capability, it presents a unique opportunity to significantly augment your retirement savings.
Action to take: If you’ve already contributed up to the maximum deferral limit of your 401(k), you may want to consider whether a mega backdoor Roth IRA makes sense for you.
6. Make sure your old 401(k) plans are working for you
If you’ve opted to keep an old 401(k) with a previous employer’s plan, you’ll want to keep an eye on how these investments are serving you. Your old 401(k) may have significant account fees, or the investment options may be more limited.
Action to take: If you have a 401(k) that is still with a past employer’s plan, consider whether it makes sense to roll it over into an IRA or your new employer’s plan (if permitted by the plan). A potential benefit of an IRA rollover is having access to a wider range of investment options, since you’ll be in control of your retirement savings rather than a participant in a company plan. Our rollover evaluator is a good place to start.
Learn more: Should you borrow against your 401(k) before you retire?
7. Routinely review your investments
While it may be tempting to “set and forget” your 401(k) investments, doing so may cost you in the long run. As part of your 401(k) investment strategy, you’ll want to annually and actively review your 401(k) in tandem with all other investments to ensure you’re comfortable with your investment mix and asset allocation.
You might leave things as they are, or you may decide it’s time to rebalance and strategically move assets to different allocation amounts. Regardless, this check-in allows you to fine-tune your investments for the long run.
Action to take: Conduct a yearly review to assess your investments, including your 401(k), so they’re aligned with your retirement goals.
8. Avoid early withdrawals
While there are certain scenarios where you can withdraw funds from a 401(k) before retirement, these withdrawals come with implications that can offset the account’s tax-advantaged benefits.
Possible penalty: You may have to pay a 10% early withdrawal penalty, in addition to taxes, if you make a withdrawal before the age 59½ if you’re still working or age 55, if you separate from service.
Action to take: Generally, avoid taking early withdrawals or a 401(k) loan. By staying continuously invested, you’ll potentially be able to enhance your 401(k) investment growth and returns.
Let’s review your 401(k) investment strategy together
For many investors, their 401(k) is the cornerstone of their retirement income strategy. Together, we can position your retirement portfolio to help reach your financial goals.