Why High Earners Are Rethinking the 401k Max-Out Rule
(Bloomberg) — If there’s one piece of money advice that’s practically gospel, it’s max out your 401(k). Millions of professionals have built their nest eggs by taking the tax break, putting investments on autopilot and letting compounding do the rest.
Lately though, some savers are questioning whether the set-it-and-forget-it 401(k) is holding them back.
Some are betting today’s relatively low tax rates won’t last, making the upfront break of a traditional contribution less attractive if they’ll owe more in retirement. Others want more control over how their money is invested or when they can access it. And with already-hefty nest eggs after years of strong market gains, some are deciding they can put their money elsewhere. Fidelity counted a record 769,000 401(k) millionaires in the second quarter, up 19% in just three months, helped by a hot stock market.
Charlie Dice spent nearly a decade dutifully funding her workplace retirement plan. Now, with about half a million dollars saved, the 39-year-old has decided she can ease off.
She plans to cut her contribution from 20% of her pay to 5% — enough to capture her full employer match — and redirect the difference to a brokerage account and Roth IRA. She hopes to retire early and wants to build up savings that she can access without withdrawal penalties before age 59.5.
“People, especially my generation, need to not box themselves into one way of thinking because that’s what our parents and grandparents did,” said Dice, who lives on a farm outside Lancaster, Pennsylvania, and works helping farmers and ranchers apply for federal loans and assistance.
For ambitious savers like Dice, the question is no longer simply how much they can put away, but where the next dollar is best invested. Armed with brokerage apps, a flood of online investing advice and a market delivering robust returns, they’re on the hunt for better, more flexible ways to grow their money.
Most US workers can contribute up to $24,500 to a 401(k) this year, with money put into a traditional plan reducing taxable income today. The share of high earners who are hitting that maximum has fallen, though. Some 51% of workers earning $150,000 or more with a Vanguard plan hit their max last year, according to the firm’s annual How America Saves report, down from 60% in 2018. Among workers earning $100,000 to $149,999, it dropped to 10% from 22% over the same period.
Vanguard says the decline reflects rising contribution limits and incomes. Someone earning $150,000 in 2018 had to defer about 12% of their pay to reach the annual limit, compared with roughly 16% today. Wage growth has also pushed more people into higher-earning groups. Employee deferral rates remain high on average.
But retirement experts say more people are forgoing the max to spread their investments in places they might get better or different returns.
“When we first started on the 401(k) plan, it was, ‘Let’s get people going. Let’s get people accumulating’,” said Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute. “Now we have these successful people doing it. We need to be more sophisticated than just max it out.”
Copeland first observed people rethinking how they approach the 401(k) about two years ago and says the shift has accelerated over the past year. Now, many people contribute up to their employer match, then fund things like Health Savings Accounts, Roth IRAs and brokerages before putting more in their employer plan.
Zach Hartley, a certified financial planner in Athens, Georgia, says fewer clients are maxing out their 401(k)s now. He doesn’t formally track the number, but during one recent week, nine of the roughly dozen people he met with weren’t hitting the annual limit. Higher living costs may be part of the reason, he said, but many also don’t want so much of their money tied up until they turn 59.5.
Sometimes, Hartley is the one recommending they stop short of the maximum. Some of his clients are already on pace to accumulate far more than they expect to need in retirement — say, $5 million when they need $3 million — and can reevaluate where they want to invest. Others want to retire early or put money toward more immediate goals such as their children’s education.
“There’s no good or bad tool in financial planning, there’s just good and bad fits for what you’re trying to accomplish,” he said.
Hartley and his wife are making that tradeoff at home, too. She isn’t maxing out her retirement plan as they prioritize saving money that will help their two daughters, like for private school, college or buying a house. “We are okay retiring later if that means we can help our kids out,” he said.
Among those deliberately choosing to put money elsewhere, the current tax regime is one of the biggest considerations. Traditional 401(k)s leave savers exposed to whatever tax rates prevail when they withdraw the money, while required minimum distributions can eventually force them to recognize taxable income whether they need the money or not.
A 401(k) is “kind of a paradox of an asset. It both grows and erodes at the same time,” said Ed Slott, a retirement-finance expert and author. “What it really is, is a loan you are taking from the government to be paid back at the worst possible time down the road, in retirement when you don’t even know what the tax rates will be.”
Some savers are betting those rates have more room to rise than fall. When Congress created the framework for the 401(k) in 1978, the top marginal income-tax rate was 70%, compared with 37% today. A married couple earning the equivalent of about $177,800 in taxable income today would have faced a top 49% tax bracket in 1980, versus 22% now.
That doesn’t mean the 401(k) tax break has lost its value. Hartley recently advised a client whose top marginal tax bracket was 32% to put more into their 401(k), bringing them back into the 24% bracket. He then suggested putting the roughly $9,000 in tax savings into a brokerage account or Roth IRA.
“I think the public’s perception is that maxing out the 401(k) is outdated,” Hartley said. “In reality, it can still be a really great thing to do.”
Savers also don’t necessarily have to leave their workplace plan to get more flexibility. Some can tap the money early without the usual 10% penalty via provisions like the “Rule of 55.” And nearly 97% of 401(k) plans administered by Fidelity now offer a Roth option, according to the firm, allowing workers to pay taxes upfront and take qualified withdrawals tax-free in retirement. Only about 19% of workers with access contributed to one in the second quarter of 2026, up from 13% five years ago.
For some, though, there’s a bolder idea at work: that they can do a better job investing the money themselves.
For a generation steeped in investing apps and financial content, handing everything over to a target-date fund can seem almost amateur. Among investors under 35 with money outside retirement accounts, 82% own individual stocks, compared with 47% who own mutual funds, according to FINRA Foundation research. And 61% say they make investment decisions based on recommendations from social-media personalities.
Rahul Shirahatti, a 25-year-old who works in wealth management, has never maxed out his workplace retirement plan — and not for lack of funds. He contributes 5% of his paycheck to capture his full employer match, then directs much of the rest to his Roth IRA and other investments. He estimates he invests 40% to 50% of his take-home pay and has already amassed multiple six figures in his brokerage account.
Shirahatti doesn’t want the bond exposure that comes with his plan’s target-date fund and prefers holding individual stocks such as Nvidia, Apple and Meta, as well as crypto. He knows he’s taking on more risk, but says he’s comfortable doing so after researching the investments himself.
He also likes having accounts that are taxed differently and wants the option to tap that money earlier.
“If people aren’t super well-versed and don’t understand how stocks work, then yes, continue to max it out,” he said. But it “doesn’t give as much flexibility for someone that does take this seriously and does it as a hobby as well.”
But that kind of self-directed investing worries some defenders of the traditional 401(k). Among investors who use social media to inform their decisions, 63% rated their investment knowledge highly, according to 2026 FINRA Foundation research. Yet they answered just 42% of an objective investing quiz correctly — worse than investors who don’t use social media for investment decisions.
“People shouldn’t be thinking about playing with financial markets that much,” said Alicia Munnell, senior advisor at the Center for Retirement Research at Boston College. “Put your money aside and have it invested in a sensible way. That’s what 401(k)s do.”
Munnell learned that lesson herself. When she left the Federal Reserve Bank of Boston in 1993, she took a payout from her pension, intending to invest it on her own. Instead, she spent the money.
“We all need a little discipline and a little guardrails,” she said.
To contact the author of this story:
Sarah Foster in New York at [email protected]
