Are you avoiding the 5 biggest 401(k) mistakes?
These mistakes could cost you up to $100,000+ in hidden losses.
Is your 401(k) costing you $100,000 in hidden losses?
Most people's 401(k) is the #1 or #2 largest part of their savings. One mistake, one wrong investment choice could cost you tens or even hundreds of thousands of dollars.
What could you do with $100,000 more in retirement? Take a dream vacation? Pay for the grandkids’ college? Let you retire a year earlier?
These are the most common and costly 401(k) mistakes. We’re going to share how to avoid them.
1. Missing out on free money from your employer match.
2. Picking the wrong investments or allocation.
3. Not growing your contributions over time.
4. Contributing too early or letting a bonus prevent you from getting your entire match.
5. Misunderstanding the Traditional vs. Roth choice and losing the tax savings.
You already know the basics.
A 401(k) is an employer-sponsored retirement account that offers three powerful benefits:
Employer matching.
Tax advantages - save on taxes now or never pay taxes on growth.
Higher contribution limits than IRAs - save up to $23,500 in 2025.
Note: While there are minor differences between 401(k) and 403(b) plans, the strategies discussed here generally apply to both. We'll refer to both as 401(k)s for simplicity.
Mistake #1 - Missing out on the Free Money. Get Your Employer Match
If your employer offers matching, this is your absolute first priority.
A typical match might look like "50% of your contributions up to 6% of your salary.
If you earn $60,000
Your 6% contribution = $3,600/year
Employer's 50% match = $1,800/year
That's $1,800 in free money and extra pay just for participating!
Never pass this up.
Make sure when that you have opted into your 401(k) program. Don’t let any other information in this article stop you from starting today because getting your free match is more important.
Mistake #2 - Picking the Wrong Investments
Your 401(k) is an investment account. As such, investing best practices apply. These will help you maximize your investment returns.
Minimize your fees: Look for funds with expense ratios under 0.5%. Lower is better. Every 0.5% in fees could cost you tens of thousands over your career.
Diversify broadly: Choose diverse index funds of stocks and bonds based on your timelines and risk tolerance. If you are unsure, see the next bullet.
If you aren’t sure how to construct your own portfolio, choose a target-date fund: These have low fees, are already diversified, and have the added benefit of automatically adjusting as you age.
Rebalance your accounts: Most 401(k)s can automatically rebalance for you. Set that up to keep your investments aligned with your goals and timelines.
Mistake #3 - Not Increasing Your Contribution
If you want to build wealth, the tax benefits of a 401(k) are powerful, and most people should maximize them.
Take advantage of automatic increases in your 401(k)
Many 401(k) plans have an automatic increase feature that you can turn on to increase your contribution.
Tell your plan provider to increase your contribution every year. For example, you could tell your provider to increase your contribution by +1% per year in the month you expect to get your raises.
That being said, if your plan is not to build significant wealth or retire early, you can stop increasing your percentage once you save 15-20% of your income for retirement.
Mistake #4 - Hitting your max too early. (Watch out for Bonuses)
If you max out your 401(k) before year-end, you might miss part of your employer match because most companies only match income on paychecks when you contribute.
What does that mean?
If you hit the annual limit, you stop contributing.
If you stop contributing, your employer stops matching.
If your employer stops matching, you lose out on matches for the rest of the year.
Let’s look at an example:
You make $120,000
Your company matches 100% up to 4% of pay.
You contribute 30%.
How this goes wrong:
Your monthly contribution: $3,000 (30% × $10,000)
Employer monthly match: $400 (4% × $10,000)
You hit the $23,500 limit in August
Employer has only matched $3,200 (8 months × $400)
You miss $1,600 in matches for the remaining 4 months of Sept-Dec.
In this case, your employer has matched 4% of your pay through August rather than 4% of your income for the entire year.
Watch out for Bonuses
Big bonuses can throw off your contribution timing. To avoid this:
Calculate your contribution percentage based on total compensation (salary + expected bonus.)
Review and adjust your contribution percentage after receiving bonuses.
Aim to contribute something in every paycheck of the year.
Note: Some companies offer a "true-up" feature that fixes this at year-end, but sadly, they are not common. Check with HR to understand your plan's rules.
Mistake #5 - Misunderstanding the choice between Traditional and Roth 401(k)s
Traditional 401(k)s give you a tax break now. You don’t pay tax now but will pay tax in retirement when you withdraw the money.
Traditional 401(k)s = Contributions are tax-deductible now > Investments grow tax-deferred > Withdrawals are taxed as ordinary income.
To see how the tax savings work for a Traditional 401k, consider an example where someone is making $130k, contributing $20k to a 401k and expects to need $100k per year in retirement:
Roth 401(k)s work in reverse – you pay taxes on your contributions now but never pay taxes on the growth or withdrawals in retirement. It's like pre-paying your tax bill at today's rates.
Roth 401(k)s = Contributions are made with after-tax dollars > Investments grow tax-free > Qualified withdrawals are tax-free.
The Core Decision: Tax Timing
Our goal is to minimize the amount of tax we pay over our lifetime to maximize our after-tax earnings. If you do the right tax planning, you can increase your wealth by tens or hundreds of thousands of dollars.
The Key Question: When Will Your Tax Rate Be Lower?
Choose Traditional if your tax rate will be lower in retirement
Choose a Roth if your tax rate will be higher in retirement
Why Traditional Often Makes Sense
Many people need less income in retirement for two key reasons:
You don’t need to save anymore for retirement! The portion of your income that went to retirement savings isn’t required.
Lower expenses: Many costs decrease (commuting, kids, work clothes, etc.), though some may increase (travel, healthcare.)
If your income needs are lower in retirement, you can stay in a lower tax bracket than you were in your working years. This suggests Traditional is the better option.
That’s the case for most people in their peak working years.
I generally think about it as the default option.
When to consider a Roth
In some situations, you could expect a higher income in retirement and, therefore, a higher tax rate than you currently have.
This can be the case for people who are aiming to build wealth.
Early Career. You’re early in your career and expect your income to grow significantly.
High earners. You have a high-earning career path and don’t plan to retire early.
Pension. You have a pension, which will add income to your 401(k) and other investments.
Legacy. You plan to grow significant investments over your lifetime, often enough to leave a legacy for your family.
Inheritance. You expect to inherit a significant amount.
In all these cases, you expect to have significantly more income and wealth in retirement than you currently have.
Having a Roth 401(k) will allow you to avoid paying taxes on your 401(k) withdrawals at a time when you could have higher tax rates in retirement.
The Power of a Mix of Traditional and Roth
Tax diversification
Having both Roth and Traditional accounts provides flexibility in retirement. You can strategically withdraw from Traditional accounts to fill the lower tax brackets, then switch to tax-free Roth withdrawals to avoid pushing yourself into higher tax brackets.
Regardless of your tax and income situation, most people should have at least some funds in a Roth IRA / Backdoor IRA and some in a Traditional 401(k) or Traditional IRA to manage their income.
Managing Affordable Care Act and Medicare subsidies.
Roth withdrawals don’t currently count toward the income limits for Affordable Care Act and Medicare calculations.
Having some Roth money as part of your income mix can allow you to manage your income to take advantage of these subsidies and benefits.
What if tax rates change in the future?
This question gets a lot of debate among us wealth-building nerds.
The highest marginal tax rates have been trending roughly down since World War 2. Here’s the highest marginal tax rate.
That has benefited people who have built significant wealth. However, average effective tax rates have been relatively stable.
Does that mean the higher bracket tax rate will continue the trend of declining?
Or are they so low they have to go up from here?
I wish I knew!
While it’s impossible to predict, it can be helpful to diversify Roth and Traditional as a hedge and run multiple scenarios on the impact of raising tax rates on your situation.
What about Requirement minimum distributions (RMDs)?
Starting at age 75, the IRS requires you to withdraw a minimum amount from Traditional 401(k)s and Traditional IRAs each year, known as Required Minimum Distributions or RMDs.
These mandatory withdrawals from Traditional accounts can force you into higher tax brackets.
While Roth 401(k)s are subject to RMDs, you can avoid them entirely by rolling the account into a Roth IRA before RMDs begin.
This exacerbates the situation mentioned above, where people who become wealthier are pushed into a higher tax bracket due to RMDs.
It creates one more nuanced consideration for choosing between Traditional and Roth and may be a reason to choose Roth if you are building wealth.
Summary: Traditional vs. Roth
Choose Traditional if you expect lower tax rates in retirement (common for people in their peak earning years.)
Choose Roth if you expect higher tax rates in retirement (common for early-career or high-wealth building trajectories.)
Consider using both for tax diversification.
If your situation is complex, it is worth working with a financial professional to analyze it to maximize your wealth building.
Take Action
In summary, make sure you do the following to avoid the most costly mistakes with your 401(k):
Get your full employer match - never leave free money on the table
Choose low-cost, diversified investments
Increase your contributions regularly
Spread contributions across the entire year to maximize matching
Pick the right tax treatment (Traditional vs. Roth) for your situation.
FAQs
Q: Can I contribute to multiple 401(k)s if I have multiple jobs in a year?
Yes, but your total personal contributions across all plans can be at most $23,500 (2025 limit). Employer contributions are tracked separately per plan.
Q: What is the Mega backdoor strategy?
This allows you to contribute more than the employee limit to your 401(k) by contributing extra after-tax dollars into your 401(k) up to the total employer + employee limit. Not all plans allow this. You have to be able to make after-tax contributions (which are different from Roth.) Then, make either in-service distributions or in-plan Roth conversions.
Q: How does vesting affect my strategy?
While you should always get the entire match, consider staying at a current job through vesting milestones if you're close. Leaving too early means losing unvested matching funds.
Q: How do 401(k) loans work?
You can borrow up to $50,000 or 50% of your vested balance (whichever is less) from your 401(k). While you pay interest to yourself, you lose potential market gains, and if you leave your job, the loan typically becomes due within 60-90 days. Consider this as a last resort after exhausting other options.
Q: What happens to my 401(k) if I change jobs?
You have four options: leave it with your old employer, roll it to your new employer's plan, roll it to an IRA, or cash out. My general typical recommendation is to roll it into your new employer so that a.) it’s all in one place and b.) If you don’t have a Traditional IRA, that could cause problems with the backdoor IRA strategy.
Q: What if I am planning to retire early?
There are a few options. You can use a Roth conversion ladder to access contributions early. The “Rule of 55” lets you withdraw from your current employer's 401(k) penalty-free if you leave that job at age 55 or later, or you can set up Substantially Equal Periodic Payments (SEPP) to access funds before 59½.
Q: What if my employer doesn't offer a match?
A 401(k) is still valuable for tax advantages and high contribution limits, but you can max out an IRA first for better investment options and lower fees.
Q: What happens to my 401(k) when I die?
Your account goes to your designated beneficiaries, who have different distribution requirements and tax implications depending on whether they're your spouse. Make sure you assign beneficiaries to all of your accounts!