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(Maury Beckman)

For almost all of 2022, consumers have had to contend with high living costs. This has led many people to reduce their pension plan contributions or even stop them altogether.

But inflation has slowed in recent months and is expected to continue in 2023. This can make funding a retirement plan more feasible. And if your finances really take a turn for the better in the new year, you may be in a position to max out your employer-provided 401(k) plan.

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At first it may seem like a great idea. But before maxing out your 401(k), you may want to consider whether the plan really meets your needs.

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Could be a better place for your money

While saving in a 401(k) is fine and dandy; your payments are immediately deducted from your paycheck so you don’t have to think about them; there are certain pitfalls you may encounter if you choose savings in your employer’s plan. .

For one thing, your 401(k) can be loaded with fees. Some of these can be avoided by choosing the right investments, such as choosing index funds over mutual or target funds, which tend to have higher expense ratios. But 401(k)s have administrative fees attached that can eat into your return. If they’re heavy on your employer’s plan, you can put your savings into an account that won’t charge as much.

Then there is the question of how you will invest your money. You generally cannot select individual stocks in an employer-sponsored 401(k). If you’re more of a hands-on investor, this may not be a problem. But if you are someone who knows the market and understands how to analyze a business, then these are skills that you can put to good use. Then you may find that an IRA is a better choice for your retirement savings.

With an IRA, you can hand pick stocks and the fees tend to be lower. Also, not every 401(k) plan includes a Roth savings option. But as long as you meet the income limits, you can choose to invest in a Roth IRA and take advantage of tax-free investments and retirement withdrawals, among others.

Don’t Rush to Max Out Your 401(k)

Maxing out your 401(k) may seem like a smart thing to do in 2023, especially if you’ve fallen behind on retirement savings recently. But before you go down that road, consider how happy you really are with your 401(k). You may find that an IRA works better for you.

That being said, it’s always a good idea to contribute enough money to your 401(k) to claim your employer’s match in full, assuming you qualify for it. That’s free money you don’t want to pass up. But once you hit that match, you shouldn’t feel compelled to stick with your employer’s 401(k) just because the option is available.

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