A 401(k) can be a great way to save for retirement, but a few wrong decisions can derail your progress. Not planning or lacking awareness of key fundamental aspects of your 401(k) can cost you, causing you to work longer to afford the retirement you’ve envisioned or to downsize your retirement dreams. Fortunately, it only takes a little planning to avoid the worst 401(k) mistakes.

Here are the biggest mistakes you can make with your 401(k) and how to avoid them.

1. Not making saving a habit

Consistent contributions and increasing them as your salary grows are vital for a robust retirement fund. In 2024, you can contribute up to $23,000 to your 401(k) ($22,500 in 2023), and those aged 50 and over can make an additional $7,500 catch-up contribution. These amounts can compound over time, significantly boosting your savings. 

Setting up your 401(k) is straightforward, and automating contributions directly from your paycheck ensures you’re steadily building your nest egg. Many plans have a feature to automatically increase your contributions each year, aligning with any salary boosts you receive. 

Typically, such automatic increases start at 1 percent annually, helping you save a greater percentage of your income as it rises. While these increases are usually capped at 10 percent, some plans may allow up to 15 percent. 

If you’re between jobs and unable to contribute to a 401(k), consider saving in an IRA to keep your retirement goals on track.

2. Leaving full employer match on the table

Many employers offer matching funds when you contribute to your 401(k), providing an added incentive to save. For instance, an employer might match 50% of your contributions up to 6% of your salary. This means you could receive up to 3% of your salary as an employer match. Be aware that this match is often subject to a vesting period, which could last several years. 

Failing to contribute enough to earn your company’s match is akin to leaving free money on the table. Experts frequently recommend maximizing this free money in your 401(k). Fully leveraging an employer match can significantly accelerate the compounding of your savings.

3. Not waiting until you’re vested in your 401(k) to change jobs

Although your employer may contribute to your 401(k), the money isn’t truly yours until you’re vested. Vesting can happen immediately, or it might take several years. If you leave your job before vesting occurs, you forfeit the unvested matching funds, though you’ll retain any contributions you’ve made from your paycheck. 

Know your company’s vesting policy to avoid leaving money on the table when switching jobs. Walking away from non-vested employer contributions and their potential growth can be a costly mistake.

4. Thinking there’s only a single type of 401(k) account

Workers usually choose between two main 401(k) account types: traditional and Roth. When planning for retirement, understanding the differences is crucial. 

A traditional 401(k) lets you contribute pre-tax money, which means you don’t pay taxes on that money right away. However, you will pay taxes when you withdraw the money in retirement. 

The tax savings from these pre-tax contributions can be significant, especially if you’re in a higher tax bracket. 

On the other hand, Roth 401(k) contributions are made with after-tax money. This means you pay the taxes upfront, but your withdrawals in retirement are tax-free, allowing you to enjoy the full growth of your investments without paying taxes. 

It’s vital to know the differences to establish which best serves your unique financial needs.

5. Withdrawing early from your 401(k)

One of the most damaging actions you can take with your retirement savings is using your retirement account like a piggy bank. This includes taking a loan or making a hardship withdrawal from your 401(k). 

If you cash out your 401(k) before you turn 59½, you’ll typically face a 10 percent penalty from the IRS, on top of the income tax you’ll owe on that money. While some plans allow for loans or hardship withdrawals, these often come with fees. Additionally, you’ll lose out on the potential investment gains that your money could have earned if it had stayed in the account.

6. Focusing on your daily balance

Constantly monitoring your 401(k) balance can be detrimental. If you check it daily or even weekly, you might feel anxious about market fluctuations, leading to hasty decisions like reducing or halting your contributions. This anxiety-driven behavior can derail your long-term growth potential. 

Instead, focus on your overall long-term strategy and stay committed to it. Remember, investing is a marathon, not a sprint.

7. Not rolling over existing 401(k) accounts

Changing jobs is a regular part of many people’s careers, but it can lead to one of the biggest 401(k) mistakes if not handled properly – failing to rollover old 401(k) accounts. When you switch employers, it’s critical to have a plan for your existing 401(k) account.

You might opt to leave it where it is, roll it into your new employer’s 401(k) plan, or roll it into an IRA. Neglecting to take one of these steps can lead to several negative consequences. For instance, leaving your account with a previous employer, especially if it’s a small one, might require a move or risk a forced cash-out, which could lead to tax implications and penalties. Furthermore, if you have accounts scattered across various past employers, it can become challenging to keep track of funds and maintain a unified investment approach.

Bottom line

Avoiding these 401(k) pitfalls is entirely possible with a bit of education and active participation in your retirement planning. Taking the time to understand your options can profoundly impact your future. Many 401(k) plan sponsors offer resources, including access to financial advisors, to help you navigate the essential aspects of your plan. 

Editorial disclaimer: Piere does not provide legal, tax, investment/retirement planning, or financial advice. Piere is not a financial advisor, planner, broker, or tax advisor. Any content Piere produces is provided for educational purposes only and is intended only to assist you in your financial organization and decision-making. Your personal financial situation is unique, and any information provided may not be appropriate for your situation. Readers are encouraged to conduct their own due diligence and consult with a qualified financial professional before making any financial decisions.