Takeaways
- Personal finance experts recommend creating financial goals to prioritize actions.
- The annual 401(k) contribution limit is $23,500 for 2025 if you are under 50.
- Repaying high-interest debt or paying off student loans might take priority.
- Building savings like an emergency or slush fund can alleviate financial stress.
- Financial advisors can help sort through what should take priority to maximize your progress.
Personal finance success doesn’t occur linearly. Even for mega savers in the Financial Independence Retire Early (FIRE) community, achieving financial success occurs in stages and with predictable patterns. Depending on where you are on your financial journey, maxing out your 401(k) contributions might not be the best financial decision. For others, it is the perfect money move.
Most personal finance success comes from mental fortitude. Creating smart money habits, such as sticking to a financial plan, adhering to a budget, and regularly saving, are all pieces of the puzzle that pave the way to financial success. Depending on where you are along the success continuum, you might have more important objectives than simply trying to maximize your 401(k) plan contributions.
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Knowing Maximum 401(k) Contributions
If you are wondering about the 2025 maximum 401(k) contribution limit, you are not alone. The maximum contribution is determined by the Internal Revenue Service (IRS) and tends to change annually. You can keep an eye out for these changes because the IRS announces changes in the fourth quarter of the calendar year.
For the tax year 2025, employees can contribute up to $23,500 to their 401(k) plan account, a $500 increase from the 2024 limits. Employers aged 50 and over are allowed catch-up contributions of up to $7,500 for 2025.
Saving the full $23,500 or $31,000 annually and harnessing the power of compounding interest could put you in rarified air as a 401(k) millionaire.
Depending on your financial situation, this might not be the best use of your time, money, and energy. This largely depends on how you prioritize your financial goals. For example, young professionals could focus on reducing their debt load and paying off credit cards or student loans.
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4 Alternative Financial Goals to Consider
Here are four financial goals to consider before maxing our your annual 401(k) contribution limits:
Paying off Debts
While saving for retirement is an absolute must among recommendations given by finance professionals, it is critical to look at your financials holistically. If you have just graduated from college or graduate school, your priority might not be saving for your retirement in 30 years. Instead, you might be focused on more near-term items like paying off high-interest credit card debt or getting rid of your student loans.
There are two schools of thought about the best way to pay off debt. The snowball method focuses on paying off your smallest balances first, regardless of interest rate. The avalanche method, however, prioritizes focusing on your debts with the highest interest rate first, regardless of balance.
With rising cost of living, inflation, and higher housing costs, young professionals gravitate to reducing their total debt outstanding. This frees up their monthly cash flow, allowing them to live more comfortably and have financial breathing room. Without the burden of high-interest debt, you can start aiming to build your net worth through savings and creating a financial barrier between your unexpected expenses by saving an emergency fund.
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Saving an Emergency Fund
Saving an emergency fund is one of the first saving hurdles most people face. According to a recent survey, the average U.S. citizen cannot come up with $1,000 to cover an emergency expense.[1] This is obviously problematic.
Learn More: How Much Money Should You Keep In Your Savings Account
An emergency fund of $1,000 to $3,000 (if you live in a more expensive city) can absorb unexpected expenses and help you distance yourself from relying on high-interest debt, like credit cards. While you can technically access your 401(k) funds, an early withdrawal can come at the cost of penalties and taxes. Some 401(k) plans also offer 401(k) loans.
After you top off your emergency fund, you can start saving a slush fund, which is three to six months of living expenses.
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Non-Retirement Savings
Once you get past saving for an emergency fund, there are other practical considerations for everyday life. For working professionals who must commute to the office, saving to buy a new car might be a better use of your money. Alternatively, you might be expanding your family and need to upgrade your sedan to an SUV.
Another option is to pay off your car note quickly. Maybe you saved enough for a down payment on your car note but want to get rid of the note. Paying off this debt might take priority over maximizing your 401(k) savings.
While retirement savings can increase your net worth, so can other options. Buying a house can increase your net worth over time as you build home equity. And if you are in the family-building stage of life, or simply want to buy your home, saving for a down payment can be challenging because it is the highest barrier to homeownership.
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Other Investment Accounts
Another consideration is to analyze whether you should maximize your contributions to a Traditional IRA or Roth IRA. These accounts each have a 2024 contribution limit of $7,000, with a $1,000 catch-up contribution if you are 50 or older. IRA accounts have several advantages over an employer-sponsored 401(k) plan, including investment flexibility.
IRA accounts allow you to invest in individual stocks or bonds. Additionally, they offer a variety of mutual funds and exchange-traded funds (ETFs), some of which are not available through the buffet of investment options in your 401(k) plan. Traditional and Roth IRAs are great places to invest, especially if you have already contributed up to your 401(k) matching contribution limit. You can set these up at one of the best online brokerage accounts.
You can also invest in cryptocurrencies, like Bitcoin, in your individual retirement accounts. Alternative IRA accounts allow you to diversify your holdings even more.
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Find a Financial Advisor
Balancing today’s wants with your future needs is a balancing act. Advice from a financial advisor can help you prioritize financial goals in an order that makes sense. It is essential to remember that you don’t have to accomplish everything at once. Instead, you can focus on building small wins. These small wins will usher in big changes later.
By prioritizing your goals, you will gain clarity and relieve anxiety because you remove opaqueness about the future. With clear direction and actionable steps, you can create the future you want.
Avoiding the Top 12 Most Common Financial Mistakes is just as important as sticking to your goals.
Smart Summary
With your financial house in order, maximizing your 401(k) contributions can increase your retirement savings dramatically. Over time, these savings can accumulate and appreciate, providing much-needed financial support in your retirement years. Maximizing your annual 401(k) savings will make you a super saver and make you the beneficiary of your company’s matching contributions (if they provide this benefit).
Achieving financial independence and gaining a solid retirement requires time and consistent savings. High-income earners Not Yet Retired (HENRYs) can adopt the strategy of maximizing savings without significant lifestyle adjustments. But if you are still trying to meet other critical financial goals first, you can reprioritize maxing out your 401(k) contributions once those goals are completed.
(1) Bankrate. Bankrate’s 2023 Annual Emergency Savings Report. Last Accessed January 20, 2025.
