It stands to reason that maxing out your 401(k) and IRA every year is a good thing. With one out of every three individuals having nothing saved for retirement, contributing the maximum is an achievement.

In many cases, it makes sense to pursue maxing out all available retirement plans. Doing so is one of the best ways to prepare for your post-workforce life. (For more, see: 4 Ways to Maximize Your 401(k).) However, it isn’t always the wisest of moves. Here are some of the times when you may want to consider not maxing out a 401(k) plan.

If you are carrying high interest debt, particularly credit card debt, maxing out your 401(k) may not be a good move. “If you have high interest credit card debt, that can be debilitating and certainly should be addressed in a priority manner,” says Robert R Johnson, Ph.D., CFA, CAIA and president of The American College of Financial Services.

You may want to be actively saving for retirement, but in many cases it’s simple math. Considering an average return of 7-8% in the stock market versus the current average interest rate on credit cards of over 16%, the math is in favor of paying off the debt first, then maxing out your 401(k).

This does not mean you must put off saving for retirement while paying off debt, as they are not mutually exclusive, nor does it mean you should not take advantage of a 401(k) match – after all, that’s free money and provides an instant return. “Employer matching contributions are a method used to encourage employees to contribute to their 401(k)s. Essentially, someone is paying you to save money for your retirement – don’t pass up that opportunity!” says Alexander Rupert, CFP®, Laurel Tree Advisors, Cleveland, Ohio.

Focus your effort on killing debt so you can pivot to maxing out your retirement accounts once you are debt free. (For more, see: How the Cost of Debt Affects Retirement.)

2. You Have No Safety Net

Many consider saving for retirement an emergency. You want to do as much as you can so you can manage retirement life well. But if you don’t have an emergency fund you will want to focus on building that and not maxing out your 401(k).

“An emergency fund is one of the most important parts of a financial plan that is frequently overlooked. Having a suitable emergency fund allows you to handle financial emergencies without dipping into your savings or selling less liquid investments,” says Kirk Chisholm, wealth manager at Innovative Advisory Group in Lexington, Mass.

Most experts recommend creating an emergency fund of three to six months of living expenses. Don’t let the overwhelming amount hold you back. Instead, focus on building the first month, then three months and so forth. This will help break up the savings into smaller chunks and will allow greater opportunities for success. Then, you can focus on maxing out your retirement contributions.

One thing to remember is that any contributions to Roth IRAs can be withdrawn tax- and penalty-free in the event that you face an emergency and don’t have adequate funds. (For more, see: Common Questions About Retirement Plans.)

3. You Experience a Major Life Event

Major life events are expensive. Whether it be saving to buy a house or helping a child pay for college, they require substantial funds. If you face a similar circumstance, it may not make sense to max out your 401(k). "If you found yourself in a situation where you are close to having enough for your down payment, but need the extra spending boost redirecting some funds from retirement, it can make sense,” says Eric Meermann, CFP, at Palisades Hudson Financial Group in Scarsdale, N.Y.

The redirection of funds will allow you move through the life event with greater ease. After the event has passed, you can go back to maxing out your 401(k) contributions. Similarly, it makes sense to have adequate insurance coverage before maxing out retirement contributions to protect against being unprepared.

4. You Need to Borrow from Your 401(k)

Maxing out retirement contributions is great in theory. You put your best foot forward towards retirement by doing so. However, the last place you want to be financially is to need to take out a 401(k) loan because you didn’t wisely prepare for other situations. A 401(k) loan may seem like a good idea, but in many instances, it will work against you, not for you.

“A major drawback of a 401(k) loan is that it will become immediately due should you separate from service with your employer. Defaulting on such a loan will result in a distribution, which will subject you to income taxes and penalty taxes if you are under age 59½ and do not qualify for any exceptions,” says Christopher Gething, CFP, founder of Atherean Wealth Management, LLC, in Jersey City, N.J. “A 401(k) hardship loan is available under certain circumstances; however, such a loan has major drawbacks. If you take a 401(k) hardship loan, you will typically not be able to make contributions to the plan for a period of six months. If your employer makes contributions to your account, these will be suspended for six months as well.”

Focus on making sure you have all your financial bases covered, then you can max out your 401(k) and other retirement account contributions.

The Bottom Line

Maxing out your 401(k) each year is a great accomplishment. But there are times when it’s not the best option for you and your needs before moving forward. (For more, see: Maxing Out Your 401(k) is Profitable: Here's Why.)

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