From the moment we begin working, we are taught that a 401(k) is crucial for retirement and to start contributing immediately. Some companies make you wait a few months which makes it seem like a good idea… until it isn’t. Giving up such a high percentage of your paycheck may backfire down the road, especially if you spent years contributing. Life throws curve balls and not having access to your money when you need it most can be tough. Or worse, accessing that money and paying fees, penalties and taxed at a high rate. A survey from Bankrate says that 51 percent of Americans have taken an early withdrawal from their 401K, including 20 percent who have taken one since the pandemic began in early 2020. More recently (2023) CBS reports that a record number of Americans tapped their 401(k) plans last year for so-called hardship withdrawals, up 2.4% from 2021.

The IRS allows penalty-free withdrawals from retirement accounts after age 59½ and requires withdrawals after age 72. There are exceptions, but they are limiting. You may avoid penalty fees, but you won’t avoid taxes. Things come up all the time like down payments for a car, or a home, or credit card debt you are eager to reduce. You can’t predict the future, so what happens if you need your money, today? 

One of our clients is a successful NYC Attorney who has a considerable amount of debt because they over contributed and lived off credit cards to be able to survive. With interest on top of what they spent, it may have made more sense to invest less to have less debt.

If your employer matches part of your contribution, that's free money but make sure you understand the terms including when your employer’s matching contributions vest (or become yours to keep). Some companies give matching contributions right away (so if you leave the company, you can take them with you), others require you to stay a certain number of years before your matching contributions are yours (or become “vested”). For example, a company may say that your matching contributions vest by 25% every year (over four years). So, if you leave before one year of employment, you will not receive matching contributions and you are 0% vested. If you leave after one year, but before two years, you get 25% of your employer matching contributions (25% vested), etc.

Investing in an IRA give you some freedom to use funds for things like college expenses or a first-time home. You may consider a 529 plan if you have children, and you need to save for college or a health savings account (HSA) if you are someone who may need to pull out money for healthcare. Another option is a taxable brokerage account which provides the flexibility of being able to access your money penalty-free. 

No situation is the same and there is no one size fits all financial plan for everyone. For some people, maxing out your 401(k) is the best decision so you can retire comfortably, for others, tying up so much money for so long may not be a good fit. To find out more about what works best for your situation, contact your financial advisor.