The unfortunate truth about maxing out your 401(k)

Millions of us have 401(k) accounts, sponsored by our employers or former employers. And hundreds of thousands, if not millions, of us actually have accounts worth $1 million or more. That’s not the norm — millionaire accounts only made up about 1.8% of 401(k) accounts administered by Fidelity, for example. But Fidelity’s recent 422,000 millionaire 401(k) accounts do show us how powerful a retirement saving tool 401(k)s can be.

Despite that, though, there’s an unfortunate truth about 401(k) accounts: They may not be your best path to growing your wealth for retirement.

Upsides and downsides to 401(k) accounts

401(k) accounts, which debuted in 1980, have some fantastic features — but they’re not perfect. Here are some of their pros and cons.

Advantages of 401(k) accounts:

• They sport hefty contribution limits. In 2024, the contribution limit is $23,000 (up from $22,500 for 2023), plus an additional $7,500 “catch-up” contribution for those 50 or older. (The IRA contribution limit, meanwhile, is $7,000, plus a $1,000 catch-up contribution.)
• Your account gets automatically funded from every paycheck, once you set it up. That can be handy for those who might otherwise put off saving for retirement or simply forget to do so.
• Many employers offer matching contributions, chipping in money into your account along with you. (It’s usually smart to contribute enough to grab the maximum match, as it’s free money.)
• Money in your 401(k) account grows in a tax-advantaged way — either by postponing taxation via a traditional 401(k) or by avoiding it altogether via a Roth 401(k).