Now that a new year is upon us, you might feel compelled to start making good on some of the resolutions you put in place in late 2023. And one of those may be to boost your long-term savings in 2024.
To be clear, saving more for retirement is always a good thing to do. But that doesn't mean your extra savings should go into your 401(k) plan. Here are a few good reasons not to increase your 401(k) contribution this year.
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1. You don't have an emergency fund
Recent data from SecureSave reveals that 63% of Americans aren't well-equipped to cover a $500 expense that's unplanned. If you don't have enough cash in the bank to cover about three months' worth of essential bills, then before you put any more money aside for retirement, work on boosting your near-term savings.
A slightly larger 401(k) or IRA won't do you much good if your car stops running and you need $2,000 to fix it in a pinch. In that scenario, taking that money out of your retirement savings would likely mean being penalized to the tune of 10% if you're not yet 59 1/2.
2. Your 401(k) plan's investment choices aren't great
One general problem with 401(k) plans is that they tend to limit savers to a bunch of different funds. You don't get the same leeway to buy individual stocks as you do with an IRA.
But even in the context of that constraint, some 401(k)s do a better job than others of offering a diverse mix of funds to choose from. If you're not happy with the investments in your employer's 401(k) plan, don't rush to increase your contribution this year. Instead, consider putting your extra money into an IRA so you can invest it in a manner that works for you.
3. You're already getting your full 401(k) match
Even if you're not in love with your 401(k)'s investment mix, it could pay to boost your savings rate in that plan this year if it means getting more free money from your employer. However, if your current savings rate is already high enough to get your complete employer match, it makes sense to find another home for your money if your investment choices leave much to be desired.
In addition to an IRA, you could look to fund a health savings account (HSA) if your health insurance plan is compatible with one. You could then have a dedicated healthcare spending account on hand in retirement -- a time when your medical bills might rise.
You may also want to consider investing outside of a tax-advantaged retirement plan so that some of your portfolio isn't restricted. This is an especially wise move if you're set on retiring prior to age 59 1/2.
In many cases, boosting your 401(k) savings rate will be a good thing to do in 2024. But if the above situations apply to you, then you may not want to increase your 401(k) plan contribution this year at all.
