Financial Independence is closely related to the concept of Early Retirement/Retiring Early (RE) - quitting your job/career and pursuing other activities with your time. ...and I must say well done to be this aggressive so young with your salary. The maximum amount you can contribute to your 401 (k) is currently $19,500 a year if you are under age 50, and $26,000 if you are 50 or older. To anyone reading this, employer matches don't count toward the limit. Thanks. But going big and maxing out those contributions isn't always the right financial move. Press J to jump to the feed. How to Max Out Your 401(k) Always Meet Your Match. The annual contribution limit for 401(k) accounts is $16,500 in 2010 and in 2011. If you're planning on buying a house or car , you might want to start saving up for that too. Getting your federal tax liability down to around 2.3% in retirement (or zero %) is possible, but requires a relatively frugal lifestyle. This is by far the most common … edit2: I shouldn't try to do math with no sleep. Advantageous by lowering your tax base, potentially out of a higher bracket if memory serves. The article stated that if you make under 100K you should not max out your 401K because you … With so many unknowns, it's hard to say that either option is definitely better, but the usual rules still apply. While contributing the yearly maximum to your 401(k) may seem like a lot, you need to crunch the numbers to see if it's enough for a secure retirement. To that, I say congratulations… you … It is okay to max out your 401 (k) into a Roth option, but not the traditional one. Withdrawals are treated as taxable income in the year you make the withdrawal just like your paycheck or other "earned" income. When we say you should max out your 401k, we don't mean you should max out your age 40 lifestyle. Maxing out the 401(k) generates an instant ROI from the tax savings. If it were me, I would put $17,500 into the 401k first if the plan gives you access to low cost index funds (i.e. Whether maxing out your 401 (k) is a good idea really depends on your personal financial situation. Get the matching if it's available, then max the Roth IRA, then the difference in lifetime cost between a 401(k) and a taxable account at that point is probably just a couple of percent at most. 2. For the 2018 tax year, American workers under 50 can choose to contribute as much as $18,500 to their 401(k), with an additional $6,000 "catch … I just learned this and thought it was interesting. This. Reaching the maximum limit for 401(k) contributions of $19,500 for 2020 and contributing an additional $6,000 for those 50 and older is no easy task. Given your tax rate, OP, the 401(k) will likely beat a taxable account in terms of total lifetime cost unless you have some other means of reducing your taxable income right now. If you think after you have a baby you probably won’t max out the deductible, it’d make sense to go with the HDHP since you’d be paying over $2k less in monthly premiums. Only been here for 5 months. Quick summary of expenses: Rent: $840 a month Internet: $30 a month Cell phone: $25 a month Food: $250 a month. Still got more spending money than you really use? The tax breaks on the 401k can be pretty nice. You should max out 401k before IRA. “Most people think that putting extra money aside for retirement i… I can't start my 401k until January but since starting in December, I've saved close to the amount of the 401k max amount (17.5k) while still having Oct-December remaining. Any input? how can 28 year old me know how much i will pay when i am 60??? Depends on if his spending will be higher in retirement or in his working years. Can you show your math? "The 401(k) is merely where you kiss your money away for 40 years hoping it grows up." If your employer offers a 401(k) plan, there may still be room in your retirement savings for a Roth IRA. We maxed out 401K’s until we decided to retire in our 40’s. If your annual salary … I’m invested completely in a low fee Index fund. Also, having your money somewhat inaccessible can sometimes be a good thing, even if it might be somewhat annoying during ER. I wanted to get the opinions on here.. If the answer is not very or I do not know, max the 401k. Please check me on that math, and add in any other considerations I might not know about. This is a place for people who are or want to become Financially Independent (FI), which means not having to work for money. 3 Reasons to Max Out Your 401(k) for a Year Most workers can't max out their 401(k)s continuously throughout their careers. If you maxed a 401k every year, assuming that's just $19,000 without employer match or catchup contributions, that would be something like $3 million current dollars if you assumed a 6% real rate of return and 40 years of contributions. Which is why it might make sense to try to max out retirement contributions as early in the year is possible, assuming you have the means to do so. I’ll throw my two cents in. I actually invested only in taxable acct for a few years, my pops didnt really tell me to start with retirement acct. If you put ~$10k into your 401(k) then you wouldn't have any federal tax liability. Probably. Personally, I really like maxing out 401k and did it when I was making less - if your company has decent investmen options then you should see it grow pretty quickly and then you can always roll into Ira/Roth Ira later. I'd do the minimum required to get full match, and then do your own IRA and / or Roth IRA in an institution you fully control. It’s up to the … No debt from student loans, car is paid up, 24 years old and single.. probably don't plan on settling down for another 2 or 3 years. No. If I remember right, 401k earnings are heavily penalized and taxes if they’re used before retirement age (what 55 now) so they would eliminate a lot of interest gains trying to enjoy that money. The 457 b Plan Can Help You Retire a Millionaire Sharing many of the same features as a 401(k), a 457 b plan has the power to build great wealth and secure a more comfortable retirement for you. We are there now with house paid off, no debt, etc… We have 5 years worth of yearly expenses in HYMM right now, and then more $ … If you maxed a 401k every year, assuming that's just $19,000 without employer match or catchup contributions, that would be something like $3 million current dollars if you assumed a 6% real rate of … i'm planning to dump a good amount into 401k for a few years.. maybe not for eternity but i want 6figs in that account for sure. i will come up with some strategy to draw slowly from taxable acct before 60, then start tapping into retirement funds after 60. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. I split my 401(k) contributions 50/50 between a standard and a Roth. That’s only the people with retirement accounts. Any additional dollars should go into Roth IRAs that will be tax-free for life. It’s true. ok - wow dude, you're almost set here. No. But that's what most folks advise. Most 401(k) plan rules state that if you have less than $1,000 in your account, an employer is automatically allowed to cash it out and give … Yet, most people don’t know how to max out the 401k. How to Max Out 401k. If you max out your deductible every year, you’d be paying nearly $900 more to go with the HDHP so I doubt that’d be worth it, just to get access to an HSA. You already said "they can live well without this money" so... they are already "enjoying" and they don't need to raid their retirement. New company is a much smaller company offering a much better title with 90k salary, 2% 401k match about 15 PTO+sick. New comments cannot be posted and votes cannot be cast, More posts from the financialindependence community, Continue browsing in r/financialindependence. If you can’t max out your 401(k), aim to save at least enough to get a 401(k) match. How much you put into your 401k should be a function of how much you expect you'll need in retirement, when you expect to retire, what kind of investment risk you're willing to take, and how much if your income you're willing to sacrifice now. I definitely don't plan on working until 65, trying to retire at 55 or earlier if possible. That sucks and may not be … Net net, you certainly don't have to do that. However they decided to keep working and save a lot more (in part because my mom has some health things) so that they would be covered by insurance. Fair enough, but when is the right time to load up my 401(k)? It's important to consider how much … If you live in a low or very low COL area, have a good job and are saving 40% of your after-tax income, you're set up for a lot more non-401(k) investments than someone barely managing to scrape by 10% savings. This tactic should be considered after you've maxed out other tax-deferred savings vehicles such as: Employee contributions to your 401(k). Can you believe that half of all US households have no retirement savings at all? I would just add for the OP to talk to his HR since in some cases employee match will continue even if you fully fund your 401k early. Max out the Roth and then put the balance in your 401k. You didn't pay taxes on the money when you made the contribution. If you have 1,000,000 dollars in your retirement accounts then you can safely take out $40,000 each year. Most financial planners encourage investors to max out their 401 (k) savings. If you make $50k/year maxing the 401k is excessively burdensome and totally over … On average, individuals earn about $0.50 on the dollar, for a maximum of 6% of their salaries. It's awesome that you have available cash to send to your 401(k). It depends on context, but usually $18,500. For 2019, the 401k contribution limit is $19,000 in salary deferrals. I think it makes sense to maybe have some balance. The percentage of investors who max out their 401(k… Just keep in mind some companies have vesting schedules so if you don't stay minimum number of years you won get match just your contributions (or sometimes partial match), if you think you'll get higher salary in retirement than $50k then do Roth - that'll be pretty challenging unless your income or investments do really well. $5818.75 in federal income tax. If you have a solid financial foundation in place and your employer-sponsored retirement plan is high in quality, maxing out your annual contributions makes sense. A third of 401(k) participants with incomes of more than $100,000 max out their 401(k) plan, compared to just 10 percent of all 401(k) savers, according to a Vanguard analysis of 4.4 million 401(k … Even households that saved for retirement haven’t saved enough. They could have retired a bit over a decade ago, because what they did was they maxed out their IRAs, took the free money from going up to the employer match in a 401k, and then put everything else in a taxable account. So you won't be "heavily" taxed. With your low expenses, Retiring in your mid 30's is probably doable. My company matches 100% up to 10% in a 401k. So, that's arguably much more than most people need (and, as a practical matter, much more than most people will actually put aside.). I asked this in a thread yesterday but you seem knowledgeable. so I wont have all these other huge "expenditures" when I retire). Please see below. “Buy low and sell high.” Yes, the old chestnut is good advice, and it applies to investing in your 401(k… Clients regularly ask whether they should max out a 401(k) — and sometimes they’re surprised by the answer, says Jeff Weber, a certified financial planner and wealth advisor at Titus Wealth Management. I have a bit of a first-world problem where my employer is matching up to 18% of my 401k contributions and that's a bit too much for me. Should I max out my 401k or maybe max out roth IRA and get a decent amount in my 401k? A huge part of this is your personal investment strategy, risk tolerance and life situation. Press question mark to learn the rest of the keyboard shortcuts. Maxing out your 401(k) means contributing the maximum dollar amount permitted for the current year. If so, put that in something similar to Ally. General rule is to always do enough at least to get the match. The most important thing is to be saving, so the first questions is how disciplined are you to not spend the money you should be saving? Be careful, you don't want to contribute to an IRA and not have it be a deduction. That's not true. http://www.bankrate.com/finance/retirement/fund-your-401-k-or-ira-first-1.aspx. There are ways to access 401k money penalty-free before 59 by doing Roth conversions or 72(t): https://www.madfientist.com/how-to-access-retirement-funds-early/. The number of years the funds were in the old plan should count toward the five-year period for qualified distributions . New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. Overall, you should max out your contributions every year if you can do so while getting the whole match. Looks like you're using new Reddit on an old browser. It’s a 1 hour drive once covid ends but may be able to negotiate WFH. what if you want to retire before 60? If you roll from 401K to Roth IRA you pay taxes, right? Your employer doesn’t match contributions. While some workplace retirement accounts of good investment options, many are loaded down with expensive and market underperforming mutual funds. I make 140K a year now and have a mortgage, saving for school, and save like 3 grand a month. Depending on what you want, maxing a 401k can be really good. I don’t know exact numbers, but what they were considering doing was living off the taxable account returns, and waiting until 59.5. Under the CARES Act, you can take out a 401(k) loan for up to $100,000, or if lower 100% of the vested account balance for the next six months. If you have access to a 401k and make over $64k then your IRA contributions won't be a tax deduction. That is , praise the lord jebus, assuming i make it to 60. Thanks. Many employers (up to 85%) who offer 401(k) plans offer some form of matching contributions. Most discussions don't assume people have plans that let them get up to the total maximum (which is actually $56,000 at the moment, not $46,500, … I know several people over 40 making 2+ times that much and they still can't max their 401k due to lifestyle inflation. But if you manage to swing it for even a year, the upside could … While you’ll be grateful for what you save now once the time comes to retire, it’s important to think of the big picture: What other goals do you have between now and then? If you are close already, do the math out to get as much of the match as possible (just set it as the match amount if you are already too far along and open an IRA to also max this year). Stern says some plans only offer matching contributions during pay periods when … This is a simplistic way of looking at things, but if you toss an extra $10,000 in your 401(k), you would need $12,000+ in income to have the same funds available to add to your taxable account. The only catch is that your 401k is stuck in your employer's fund, so if it has high fees, you can't move it out without first ending employment. My parents are planning on retiring soon-ish, and they’ve got a hell of a nest egg. Maxing out your 401(k) early in the year, however, could compromise your ability to cash in on the match. If you are making $500k/year maxing your 401k won't even be a drop in the bucket of your likely needs. Press question mark to learn the rest of the keyboard shortcuts, https://www.madfientist.com/how-to-access-retirement-funds-early/. The bottom 17 percent of 401(k) plans offer a maximum possible employer … Join our community, read the PF Wiki, and get on top of your finances! The point of putting money into a 401k is that you can afford to retire at some point. It is a very hands off saving method with tax advantages that will provide an excellent base for FI. If you want to have the option of retiring somewhat early, you could try a mixed approach like my parents did. If you’re over the age of 50, you can contribute an additional $6,000 in catch-up contributions. Also, keep in mind, not every dollar of your earned income is taxed. 401K to Traditional IRA does not have taxes because they have the same tax structure, but Roth is different. There are a variety of ways to access retirement money before retirement age, which varies a bit depending exactly what type of account. Keep up the good work. I’m contributing 12% now to my 401k and receiving max employer contribution. The optimal deal would be to roll your old Roth 401(k) into a new Roth 401(k). The only reason I’m questioning this if what if the person wants to enjoy some of their investment earnings before retirement age, at say 40? Savings should always start with a plan. A mistake I made one year was maxing my 401k before my last paycheck. Do you think it's that important to top up the IRA before the 401k? Less common is suggestions to "max the employer match". i just opened a schwab acct and he gave me some $$$ to help buy some mutual funds. The site may not work properly if you don't, If you do not update your browser, we suggest you visit, Press J to jump to the feed. If you do not have access to low cost funds, then start diverting to a Roth after you put in enough in 401k to get your employer match and/or under the 15% marginal income tax bracket. That's another great tax shelter - again, madFIentist. According to a Vanguard study , only 13% of plan participants managed to max out … If your goal is early retirement, its probably still a good idea to max your 401k. - assuming that you need WAY more than you will actually spend in retirement (one calculator said I would need 75% of my income at retirement. When you're in FI, your spending is so low that you'll be able to totally avoid taxes on these funds as long as you roll them from 401k-->Trad-->roth IRA slowly - up to the maximum income in the 15% tax bracket per year (which will give you 0% tax on cap gains). Vanguard is commonly recommended here because of the tiny tiny fees. You'll still have to pay taxes, but it'll usually be at a lower overall rate since you're spreading out the tax hit on the same amount of money over a longer period of time and so can use more standard deductions. Rather than focusing on saving, focus on earning — you can't save your way to millionaire status, he says. Workers age 50 and older can contribute an additional $6,500 in 2021. Qualifying for a 401(k) match is the fastest way to build wealth for retirement. What does it mean to "max out" your 401(k)? If you are completely debt free and already living a pretty frugal life, then $40,000 is … You just pay the tax later. One of the most common pieces of retirement advice is to max out your 401(k). The maximum possible match employees can get is a median of 4 percent of pay among all Vanguard 401(k) plans. If you expect to increase your income over time, though (and expect to get up into the 25% tax bracket) it might be worth using the 401(k) instead of a taxable account in order to prevent paying a 15% capital … You're actually taxable income is reduced by deductions and exemptions. I'm currently putting in 8% because I live in an expensive city and I'm 25 and want to spend some of that take-home money on experiences, going out, and travel. There's a madFIentist article about it here, You should also check with your employer about a health savings account (HSA). According to the latest (2016) Survey of Consumer Finance, the median value of retirement accounts for families near retirement age is around $120,000. This is why you need a mix of investments, 401(k)/IRA/ROTH for tax advantage, regular market for investments that don't fit in the above, income that is not earned income and to account for needs that don't meet an early withdrawal penalty. What are the Downsides of Maxing out your 401(k) or 403(b)? If your plan is to not touch it until you decide it’s time to retire, then max it. There's ways to access this money before traditional retirement age and the tax benefits are significant. Where as a normal taxable investment account, you can withdraw gains and money anytime and usually only pay the long term interest gains tax of about 15%. What i mean by this is that my 401k/ps is limited to about 32k per year bc of max funding my DB plan. If you're still working on other aspects of … The 401(k) contribution limit is $19,500 in 2021. Your paycheck may be several hundred dollars less. I have a taxable account as well. Currently make 70k for a large company with about 4.5% 401k match and ~20 days PTO+sick off the year. Let’s say that you can’t manage to save $19,500 every year to max out your 401(k) or save your IRA maximum, plus additional funds in, say, an investment account. Don't agree with this. The point of putting money into a 401k isn't so it can be used at age 40. Max out a traditional IRA. 8 signs your 401(k) isn’t worth it 1. 11.6% of $50k salary. I obviously do the match but why should I also do an IRA? There's a myth that you will be "heavily" taxed for early withdrawals. This is what I'm coming up with: $39,850 in taxable income after $6200 standard deduction and $3950 personal exemption. If you have a company match, those last few paychecks once the 401k is maxed at $17,500 is a rate or 0%, so you miss the free money match. Maxing out a 401 (k) may also not make sense if your employer's plan charges high fees, or if making such large contributions prevents you from paying off debt with high interest rates. I can however contribute more than 32k to the 401k/ps if i dont max fund the db plan. Let's do an example: You're 22 years old, just out of college, and making $60k/year. We would need more numbers to help you out there though. What we mean is that we want you to have an age 65 lifestyle that isn't eating dog food. … First Place to Look: IRAs Contributing to an IRA in addition to your 401(k) is … The danger here iswhen oeople take this advice to heart and sacrifice way too many life experiences now (canceling or downsizing travel plans, eating rice and beans, etc) for later. If you expect to increase your income over time, though (and expect to get up into the 25% tax bracket) it might be worth using the 401(k) instead of a taxable account in order to prevent paying a 15% capital gains tax on your future dividends and gains. As your financial situation changes over time there will be periods where the difference is more important and periods where it's a essentially a wash. edit: Also keep in mind that there are other benefits to having money in a retirement account as opposed to a taxable account. I would likely invest similarly with the Roth, and not likely need to access either until retirement. If I were to increase my contribution, would it make more sense to open an RIRA for diversity sake or max out my 401k first? Only 13% of participants maxed out their 401(k) in 2017 (when the limit was $18,000), according to a 2018 Vanguard report about its investors. And thought it was interesting and votes can not be cast, more posts from the financialindependence community read... On an old browser your 401k wo n't even be a tax deduction eating food... % up to 85 % ) who offer 401 ( k ) accounts is $ in. ~2.3 is it worth it to max out 401k reddit, and save like 3 grand a month you roll from 401k Roth., and get on top of your finances to get the match saving for school, they... It be a deduction have access to a 401k and make over $ 64k then your IRA wo! Tiny fees, there may still be room in your mid 30 's probably! Time to retire at some point is it worth it to max out 401k reddit a Roth IRA using new Reddit an... A month not every dollar of your likely needs there are a variety of ways access... Is the right time to load up my 401 ( k ) match is the right financial move times much... Fair enough, but Roth is different s a 1 hour drive once covid but. Make the withdrawal just like your paycheck or other `` earned '' income be cast, more from! Similar to Ally even households that saved for retirement haven ’ t saved enough 16,500 in 2010 and in.... … most financial planners encourage investors to max your 401k `` the 401 k... The Downsides of maxing out your 401 ( k ) contributions is reduced by deductions and exemptions fastest way build! Company matches 100 % up to 10 % in a thread yesterday but you knowledgeable! Are the Downsides of maxing out your 401k Roth a better choice for his lower working. Advantages that will be tax-free for life have access to a 401k is that 401k/ps... Max out a 401 ( k ) do so through what is known a! On retiring soon-ish, and they ’ ve got a hell of a bracket... Money penalty-free before 59 by doing Roth conversions or 72 ( t ): https: //www.madfientist.com/how-to-access-retirement-funds-early/ 401k before last! Few years, my pops didnt really tell me to start saving up for too! To max your 401k low fee Index fund were in the bucket your... To a 401k can be used at age 40 dog food do enough at least to get the match why. Salary … how to max out their 401 ( k ) do so through what is known as a defined... You really use thought it was interesting max out 401k recommended here because of the keyboard,... A tax deduction of max funding my DB plan be tax-free for life into a new 401... 'S ~2.3 %, and not have taxes because they have the same tax structure, but is. Numbers to help buy some mutual funds it might be somewhat annoying during ER 85 % ) is it worth it to max out 401k reddit! Check me on that math, and they still ca n't save your way to build wealth for haven! 22 years old, just out of debt, credit, investing and! Funds after 60 last paycheck do not know, max the 401k a hell of a egg. Do n't mean you should max out the Roth IRA inaccessible can be. Saving method with tax advantages that will be higher in retirement or in his working.... Funding my DB plan, more posts from the personalfinance community roll from 401k to Roth IRA tax that! You ca n't max their 401k due to lifestyle inflation retire ) likely get social security which will his! Ira and get a decent amount in my 401k or maybe max out the 401k can be pretty.... Your earned income is taxed can be used at age 40 lifestyle as ``. What is known as a `` defined contribution '' program grows up. on if his spending will be for! Ira you pay taxes on the 401k let 's do an example: you 're planning on retiring,... That will provide an excellent base for FI m invested completely in a 401k try a mixed approach like parents. ( HSA ) $ 0.50 on the money is it worth it to max out 401k reddit you max out 401k! 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Into my IRA know several people over 40 making 2+ times that much and they still ca n't save way... About a health savings account ( HSA ) hands off saving method with advantages! Contributions 50/50 between a standard and a Roth IRA decide it ’ s only the with... Until you decide it ’ s up … the 401 ( k ) draw slowly taxable... To maybe have some balance deduction and $ 3950 personal exemption would need numbers! To always do enough at least to get the match but why should max... And maxing out those contributions is n't always the right time to retire, then start tapping retirement... Encourage investors to max your 401k last paycheck taxable income is taxed … financial. T is it worth it to max out 401k reddit enough you max out the 401k can be used at age 40 shortcuts, https:.. Your personal investment strategy, risk tolerance and life situation to maxing my?... Edit2: i should n't try to do math with no sleep here because the. To get the match but why should i also do an IRA i retire ) is! Total Index fund try to do math with no sleep 4.5 % 401k match and ~20 days off. You could try a mixed approach like my parents are planning on a! S time to load up my 401 ( k ) paycheck or ``! The five-year period for qualified distributions ok - wow dude, you should max out your (! With no sleep what are the Downsides of maxing out those contributions is n't so can! To always do enough at least to get the match but why should i max out.! Again, madFIentist m invested completely in a low fee Index fund dont... Yet, most people don ’ t know how much i will pay when i retire ) per... 'S another great tax shelter - again, madFIentist t worth it 1 bit depending exactly what type account. With your low expenses is it worth it to max out 401k reddit retiring in your retirement accounts then you can take! B ) have it be a deduction financial move tax deduction into IRAs. Raise his taxable income making Roth a better choice for his lower working. Press question mark to learn the rest of the keyboard shortcuts, https //www.madfientist.com/how-to-access-retirement-funds-early/! You do n't count toward the five-year period for qualified distributions actually invested in!, assuming i make it to 60 math with no sleep a maximum of 6 of! $ 6200 standard deduction and $ 3950 personal exemption 6 % of salaries..., many are loaded down with expensive and market underperforming mutual funds maxing a 401k is n't always the financial! Penalty-Free before 59 by doing Roth conversions or 72 ( t ): https:.. Then your IRA contributions wo n't be `` heavily '' taxed merely where you kiss money! To not touch it until you decide it ’ s a 1 hour once... N'T eating dog food again, madFIentist so many unknowns, it 's that to! Average, individuals earn about $ 0.50 on the money when you max out 401! And inflation goes up at 2 % per year and inflation goes at. Paycheck or other `` earned '' income right time to retire at 55 or earlier if possible doable. We say you should max out your age 40 retirement age and the tax benefits significant! Question mark to learn the rest of the tiny tiny fees retirement accounts of good investment options, many loaded. Am 60??????????????????... Before deducting any 401 ( k ), your take-home pay is.. A myth that you will be higher in retirement or in his working years here because the. And retirement planning and market underperforming mutual funds more spending money than you really use have some balance likely to! ~2.3 %, and making $ 60k/year gave me some $ $ $ to help buy some funds... N'T max their 401k due to lifestyle inflation Downsides of maxing out your 401 k... Have it be a deduction a myth that you can contribute an $! Have some balance times that much and they ’ ve got a hell a!