How Much Should You Really Put Into Your 401(k)? The Smart Allocation Strategy

The Real Question: Where Does Your Money Go?

When it comes to retirement planning, the question “how much should I put in my 401(k)” gets asked constantly. But here’s the thing—there’s no one-size-fits-all answer. Your decision depends on three core factors: what your employer offers in matching contributions, your current financial obligations, and what other investment vehicles are actually available to you.

Think of retirement savings as layers. You don’t build them all at once. You prioritize strategically. And that starts with understanding what your company is willing to give you for free.

First, Grab the Free Money: Employer Matching

Before we talk about maxing anything out, let’s talk about matching contributions. If your employer offers a match, this is the one area where conventional wisdom actually works—you absolutely should contribute enough to capture the full match.

Here’s why: employer matching is literally free money. Your company is adding to your retirement pot at no cost to you. Common match formulas look like this:

• Dollar-for-dollar matching on the first $2,000 you contribute annually
• 50% match up to 5% of your salary
• Flat contributions regardless of what you put in

If you earn $70,000 and your employer matches 50% of contributions up to 5% of salary, that’s $3,500 eligible for matching, capping the employer contribution at $1,750. Miss this opportunity, and you’re essentially turning down a raise.

One caveat: employer matches often come with vesting schedules. You might not own the full match immediately. Some plans require 3-5 years of employment before those matching funds become fully yours. Check your plan documents.

Understanding Your 401(k) Options

Your employer likely offers two flavors of 401(k) plans, and they work differently tax-wise.

Traditional 401(k): Pay Taxes Later

With a traditional plan, contributions come straight from your paycheck before taxes are applied. Money grows tax-free inside the account. You only pay income tax when you withdraw funds in retirement.

For 2024, you can contribute up to $23,000 annually ($30,500 if you’re 50 or older with catch-up contributions). The catch? If you withdraw before 59½, you face a 10% penalty plus ordinary income taxes—with limited exceptions.

At age 73, required minimum distributions (RMDs) kick in, forcing you to take taxable withdrawals whether you need the money or not.

Best for: people who expect to be in a lower tax bracket during retirement than they are now.

Roth 401(k): Pay Taxes Now

Roth contributions are made with after-tax dollars. No tax deduction upfront. But here’s the payoff: money grows entirely tax-free, and qualified distributions in retirement have zero tax attached.

Contribution limits match traditional plans: $23,000 for 2024 ($30,500 at 50+). The advantage? You can withdraw your contributions penalty-free at any time. Only earnings are restricted.

As of 2024, Roth 401(k)s are no longer subject to RMDs during your lifetime—a significant advantage over traditional plans.

Best for: people expecting higher taxes in retirement, or those wanting maximum flexibility with their money.

Beyond 401(k): Your Other Retirement Accounts

Even if your employer offers a solid 401(k), that might not be your best move for every dollar you save. Here’s what else is available:

Individual Retirement Accounts (IRAs)

Both traditional and Roth IRAs let you contribute $7,000 annually in 2024 ($8,000 if 50+). Traditional IRA contributions are often tax-deductible, but you’ll pay taxes on withdrawals. Roth IRA contributions are after-tax, but withdrawals are tax-free.

Critical difference: Roth IRAs have no RMDs ever. Traditional IRAs require distributions starting at 73.

Income limits apply for Roth IRAs: for 2024, single filers phase out between $146,000-$161,000 modified adjusted gross income (MAGI). Married couples phase out between $230,000-$240,000. No income limits exist for traditional IRAs, though deduction limits do.

Health Savings Accounts (HSAs): The Triple-Tax Advantage

This is the account nobody talks about but everyone should. If you’re enrolled in a high-deductible health plan (HDHP), you can contribute to an HSA.

For 2024: $4,150 for self-only coverage, $8,300 for family coverage. Those 55+ can add $1,000 more.

Why the excitement? HSAs offer triple tax benefits:

• Contributions are pre-tax (or tax-deductible if self-employed)
• Growth is tax-free
• Withdrawals for qualified medical expenses are tax-free

And here’s the sleeper benefit: after 65, you can withdraw HSA funds for anything without penalty (though non-medical withdrawals get taxed). It’s essentially a stealth retirement account.

Taxable Brokerage Accounts

No contribution limits. No withdrawal restrictions. Complete flexibility. The trade-off? You pay capital gains taxes on profits and taxes on dividends.

But if you’ve exhausted all tax-advantaged options and still have money to invest, this is where it goes.

The Optimal Contribution Strategy for Limited Funds

Got a limited budget? Here’s the priority order that most financial advisors recommend:

Step 1: Capture Full 401(k) Employer Match Always contribute enough to get the complete match. That’s non-negotiable. It’s the best guaranteed return on your money.

Step 2: Max Out HSA (If Eligible) If you have access to an HSA, fully fund it before doing anything else beyond capturing your employer match. The tax advantages are unbeatable, and you maintain flexibility—you can withdraw for medical expenses anytime, or let it grow as a retirement account.

Step 3: Contribute to an IRA Max out either a traditional or Roth IRA depending on your income and tax situation. With $7,000 annual contributions, this is more accessible than 401(k) limits. Plus, IRAs typically offer more investment choices and lower fees than 401(k) plans.

Step 4: Max Out Your 401(k) (If You Can) Once employer match, HSA, and IRA are handled, returning to max out your 401(k) makes sense. For 2024, that means putting in $23,000 ($30,500 if 50+).

Step 5: Attack High-Interest Debt Before sinking more into investments, eliminate credit card debt or any obligation charging significantly higher interest than you’d reasonably earn investing. If debt carries 18% interest but your investments return 8%, pay that debt first.

Step 6: Feed a Taxable Brokerage Account Whatever’s left after all the above goes here. It’s your overflow valve for serious retirement savers.

Should You Max Out Your 401(k)?

The honest answer: it depends on your financial flexibility.

Maxing out means contributing the full $23,000 (or $30,500 if 50+) to your 401(k) in 2024. That’s a significant chunk of income. It only makes sense if:

• You’ve already captured your employer match
• You’ve maxed HSA and IRA options
• You have enough living expenses covered
• You maintain a fully funded emergency account
• You don’t anticipate needing this money before 59½

Don’t automatically assume that maxing is the goal. Some people are better served putting more into an IRA (which offers better fund choices) or an HSA (which offers more flexibility). Others should prioritize paying down high-interest debt.

Timing: Should You Max Out Early in the Year?

You can contribute your full 401(k) amount immediately in January if you want. But should you?

Mathematically, getting money in the market faster typically wins—compound growth favors early investing. However, many employers calculate matches on a per-paycheck basis. If you max out in January, you might miss matching contributions for the rest of the year if your plan doesn’t allow for catch-up matches.

Strategy: spread contributions evenly across the year unless your employer allows true catch-up contributions if you’ve maxed early. Check your plan documents.

Can You Have Both 401(k) and IRA?

Absolutely. You can contribute to both simultaneously. Just track both contribution limits separately. Contributing to an IRA doesn’t reduce your 401(k) limit or vice versa.

This is actually encouraged if your finances allow it—the tax advantages stack up quickly across multiple accounts.

The Income Factor in Decision-Making

Your salary doesn’t determine whether you should max your 401(k)—your complete financial picture does. That said, higher earners should consider:

• Traditional vs. Roth question: higher earners approaching Roth income limits might prioritize Roth conversions or Roth 401(k)s while they still can access them
• Alternative investments: six-figure earners often benefit more from maxed HSAs and IRAs plus taxable accounts rather than solely maximizing a 401(k)
• Tax planning: consider whether you’ll be in a lower or higher tax bracket in retirement

The Takeaway on 401(k) Contributions

Stop asking “should I max my 401(k)?” Start asking “what’s my complete retirement strategy?”

Capture that employer match—that’s mandatory. Then evaluate HSAs, IRAs, and other options before committing additional funds to your 401(k). For 2024, contribution limits are $23,000 for standard contributors and $30,500 for those 50 and older. But hitting those numbers matters far less than having a strategic, coordinated approach across all available accounts.

Your retirement dollars are precious. Deploy them strategically across multiple vehicles rather than dumping everything into a single 401(k) account.