5 Reasons I Max Out My 401k Retirement Account as Fast as I Can – The 25% Contribution Rule

Every year around November when the IRS publishes updated 401k plan limits for the year ahead I set myself a goal to see how fast I can reach the maximum contribution limit. I am fortunate that I earn and save enough money to make the maximum pre-tax retirement account contributions, but even if you cannot get to the maximum limit these 5 reasons to try and maximize your contributions still apply

Forced Saving

Following the holidays and into the New Year we have probably spent more than we wanted to and even dipped into our (after tax) savings. So I normally set my “financial” clock to start in February, as January is a month of catching up and taking care of bills.

So following the glut of holiday spending and financial guilt, I force myself to contribute 25% of my pre-tax income towards my 401k retirement account, until I hit the limit. For someone making $100,000  this would be approximately $965 per fortnight. At this rate you would hit the $19,500 annual limit (for 2021) sometime in early December (sooner if you get bonuses or pay raises).

The more you make and contribute the faster you get there. Some years I even set my limit at 35% – but this means strict budgeting and cutting back in lots of other areas.

Investment Options

I normally just allocate my 401k funds across low cost index funds. I have used Vanguard and Fidelity at different employers, but essentially I split my index fund allocation to try and 60% in US funds, 30% international funds and 10% bonds or money market funds.

The older you are the more you may want in bonds or money market funds. For those who say that by contributing early I may end up putting money in at the top of market, then I say put some of your savings into cash (or in a money market fund).

You can then choose to invest as and when you need, though for most investors market timing rarely works over the long run. I prefer dollar cost averaging as it is less hassle and for every peak I invest at I will also get opportunities to buy on dips.

Tax benefits and Employer matching

By contributing to my retirement account aggressively early on I reap the tax benefits on capital gains immediately (in that no taxes on any gains!). I also get the employer match much earlier so a good start to the market (first half of a year stock market performance has historically been better than later halves – google it) boosts my returns on investment.

Again per the above point if you feel the market is headed down then leave your money in a cash fund and invest as needed. The key is you are saving for the longer term.

More disposable income at year end

Once I hit may 401k max, I get a nice bump in my weekly after tax payment. By this point I have gotten used to the lower take home pay (with my higher 401k contributions) so this extra bump is nice and I can use it for upcoming holiday spending. See the virtuous cycle? Forced savings ends up providing extra longer term spending capability.

IRA boost

The other good thing about maxing out your 401k early is you can super charge your retirement savings by contributing to an IRA or even Roth IRA. Since you are already in the habit of putting away 25%, why not just keep it going. The IRA contributions are lower than 401k limits and are subject to income limits. But even if you make too much that precludes you from contributing a Roth IRA or to claim your traditional IRA deductions as a tax deduction, you can still make non-deductible contributions where the gains go tax free until retirement.

So there you have it, my rationale for maxing out 401k contributions as early as possible with the 25% rule. I know this is not going to be feasible for a lot of people, but hopefully the concept of putting away as much as you can as fast you can, will be taken to heed when it comes to your retirement planning.

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3 thoughts on “5 Reasons I Max Out My 401k Retirement Account as Fast as I Can – The 25% Contribution Rule”

  1. I think I understand Rick’s point in that if he doesn’t stretch out his contributions he might not get the full company match.
    At my company that is taken care of by a true-up contribution at the beginning of the following year. It is however a requirement that you are still employed on December 31. to get that match addition (something to keep in mind when changing jobs). HR or your retirement support team should be able to explain your specific situation . . .

  2. Per the employer matching, our plan matches 100% of first 3% saved, and 50% of next 3%, so 4 1/2 % match if I save 6%. So, if I save the maximum $18,000 + $6000 catchup too early in the year, and have no savings on my last 6 checks, I lose out on the 4 1/2% match from the employer…..that makes little sense to me. So I disagree with your thoughts on maxing out as early as possible. Thanks!

    • So I am not clear here why it makes a difference re your employer matching. Sounds like they will match your 4.5% once you you contribute 6%. So whether you hit that 6% contribution early, or later it should not matter. Again the goal is to be aggressive with your contributions.

      Note: I think the gap we have is that your salary may not be high enough to meet the 24K total contribution limit. In this situation I think you should aim to get to your maximum that allows you to get the employer match for sure, even if this means going through the whole year.


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