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Investing in a 401(k) often feels like a set-it-and-forget-it task during your working years. You contribute regularly, pick your funds, and hope to increase savings over time. For many, the account quietly grows while they focus on their careers and daily responsibilities.
But as retirement nears, a careful review of your 401(k) can reveal costly oversights. Here are some common pitfalls to watch out for before it’s too late:
1. Overpaying 401(k) fees without realizing it
Many don’t pay much attention to fees because they seem small-often around 1%. However, over a 30-year career, even a seemingly minor fee can shave off tens of thousands of dollars from your investment gains.
Choosing funds with lower fees means more money stays in your account, compounding and growing for retirement.
2. Ignoring required minimum distributions (RMDs)
Once you turn 73 (per the Secure Act 2.0), you must start taking withdrawals from your 401(k). Missing these required minimum distributions can trigger penalties and complicate your tax situation, especially when balancing income from Social Security or pensions.
Some don’t realize they must take withdrawals at all, so it’s important to plan ahead.
3. Taking 401(k) loans that limit growth
While borrowing from your 401(k) may seem preferable to high-interest debt, it comes with hidden costs. The money you withdraw stops earning returns while it’s out of your account.
Plus, if you switch jobs or lose your position, you often need to repay the loan quickly or face it being treated as an early withdrawal-with taxes and penalties.
4. Underestimating the cost of early withdrawals
Withdrawing funds before age 59½ means a 10% penalty on top of income taxes. Early withdrawals not only reduce your account balance immediately but also rob you of future growth potential-a double hit to your retirement savings.
5. Missing changes to catch-up contributions
Once you turn 50, you can make extra “catch-up” contributions to boost your savings. Starting in 2026, higher earners (those making over $150,000 annually) must make these catch-up contributions as Roth (after-tax) contributions, which could affect your tax planning if you’re used to reducing taxable income with traditional contributions.
6. Overconcentrating in employer stock
Many employers offer discounted company stock in their 401(k) plans, but putting too much of your portfolio into employer shares is risky. If the company struggles, your retirement savings could take a hit.
Experts recommend limiting employer stock holdings to 10-20% of your 401(k).
7. Assuming your 401(k) alone is enough
While a 401(k) is a valuable retirement tool, it shouldn’t be your only source of income. Ideally, retirees have multiple income streams-including IRAs and Social Security-to maintain financial security.
In fact, one in eight retirees plans to return to work because their savings fall short.
Bottom Line
Understanding your 401(k) fees, withdrawal rules, and investment choices can make a big difference in ensuring a comfortable retirement. If you’re still working, now is the time to seek professional advice, develop a comprehensive plan, and avoid costly mistakes that can erode your nest egg.
Money Tips for Everyone
Regardless of your current financial situation, there’s always room to improve your money habits:
- Increase your income: Explore side hustles or other ways to boost your earnings without quitting your day job.
- Grow your savings: Time and compound interest are powerful allies. Know where you stand financially and consider working with a professional to set goals, especially if you want to retire early.
- Seize opportunities: Take advantage of senior discounts, deals, and money-saving strategies.
For example, regularly shop for better car insurance rates to save hundreds each year. At the same time, be wary of hidden expenses that quietly drain your finances.
Being proactive with your 401(k) and overall financial plan can help pave the way for a more secure and stress-free retirement.