5 Costly 401(k) Mistakes That Could Shrink Your Retirement Savings
Most people spend more time researching a new phone than they do setting up their 401(k).
It’s easy to treat your retirement plan as a “set it and forget it” account: sign up, pick a fund, automate contributions, and move on. But the truth is, the decisions you make in those early years (and the ones you avoid making later) can shape your financial future for decades.
A 401(k) is one of the most powerful tools available to build long-term wealth, but only if you use it wisely. Here are five common mistakes that can undermine your retirement readiness and how to avoid them.
Failing to Increase Your 401(k) Contributions Over Time
Once you enroll in your 401(k) and set your contribution rate, deferrals from your paycheck happen automatically. Automatic contributions eliminate the need to remember, decide, or manually transfer money each month.
Contributions to a traditional 401(k) are made pre-tax, which means you’re lowering your current taxable income while building retirement savings. The funds in the account grow tax-deferred as well, as you aren’t required to pay taxes on the growth until withdrawals are made (ideally in retirement).
All that being said, automatic contributions can be a double-edged sword. That “set it and forget it” approach that makes contributing so easy? It can also make it tempting to neglect to increase contributions over time.
It’s important to increase your contribution percentage regularly, say by 1% annually or whenever you receive a raise. Incremental increases can add up to substantially larger retirement savings down the road, thanks to the power of compounding growth.
Only Contributing Enough to Get the Employer Match
Many employers offering a 401(k) will incentivize contributions by matching a certain dollar amount or percentage. This is a great benefit for employees, essentially earning free money that can grow tax-deferred until you’re ready to withdraw in retirement.
The catch? There are often limits to how much an employer will match. It’s not uncommon for employers to cap it at a certain percentage (say, 3% of your salary) or a dollar amount.
If you’re only contributing up to your employer’s matching limit, you’re likely falling far below the annual contribution limit. For reference, employees under 50 can contribute up to $24,500 in 2026 (or more if you’re 50 and older). [1]
Choosing 401(k) Investments Without Reviewing Your Options
Some 401(k) plans offer investment choices, such as mutual funds, index funds, and target-date funds. Too often, employees pick the first option they recognize or default into a fund without understanding what it holds or what it costs.
If you have options, take time to review them. Look at:
The fund’s investment objective
Underlying holdings
Risk level
Expense ratio (fees)
Long-term performance consistency
Target-date funds, for example, can be appropriate for many investors, but they aren’t the best choice for everyone. Different target-date funds with the same retirement year can have very different risk profiles and fee structures.
At the same time, a 401(k) is a long-term investment vehicle designed for retirement. It’s not built for active trading or trying to time the market. Once you select an appropriate allocation based on your time horizon and risk tolerance (perhaps with the help of an advisor), focus on participating consistently and reviewing periodically to adjust as needed.
Taking a 401(k) Loan Without Understanding the Risks
Some 401(k) plans allow participants to take loans from their account balance. While this feature can be helpful in true emergencies, it’s generally one of the last places you want to turn for cash.
When you borrow from your 401(k), you’re removing invested money from the market. Even if you repay the loan with interest, you’ve lost something more valuable than the interest rate: time and compounding growth. That money is no longer working for your retirement while it’s out of the account.
There are also risks if your employment situation changes. If you leave your job with an outstanding 401(k) loan, you may be required to repay it quickly. If you can’t, the remaining balance may be treated as a distribution, which can trigger income taxes and possibly early withdrawal penalties.
Early withdrawals, outside of specific exemptions, can also lead to taxes and penalties. In most cases, it’s better to explore other options and preserve your retirement savings for its intended purpose.
Failing to Roll Over an Old 401(k) Properly
Rather than let a previous job’s 401(k) collect dust (and perhaps stay invested in an ill-suited fund), consider one of two avenues:
Roll the balance into an IRA, or
Roll it into your new employer’s 401(k) plan (if allowed)
In either case, you’ll preserve the tax-advantaged status of your savings and keep your retirement plan intact.
What you’ll generally want to avoid is withdrawing the funds outright. Cashing out your 401(k) triggers ordinary income taxes and, if you’re under age 59½ and don’t qualify for an exception, early withdrawal penalties as well.
If you do a rollover, make sure the funds move directly from the old plan to the new retirement account. If the distribution check is made payable to you personally, even temporarily, you’re at risk of incurring unnecessary taxes and penalties.
Positioning Your 401(k) for Long-Term Growth and Income
Your 401(k) has the power to be a primary source of income in retirement. The decisions you make today can shape the freedom you have tomorrow. If you haven’t reviewed your plan recently, now is a smart time to do so. A financial advisor can help you evaluate your investment options, contribution strategy, and tax efficiency so your 401(k) works as intentionally as the rest of your financial plan.
Sources:
1. https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500
Robert "Fenn" Giles III, CFP®, CAIA is a Managing Partner of Wealth Advisors of Tampa Bay and serves on the firm’s Management and Investment Committees. WATB is an independent Registered Investment Advisor (RIA) located in Tampa, Florida. Learn more about them at wealthadvtb.com.
This material has been prepared in collaboration with Crystal Marketing Solutions, LLC, and has been edited with the assistance of artificial intelligence tools. The information presented is based on sources believed to be reliable and accurate at the time of publication. This material is for educational purposes only and does not necessarily reflect the views of the author, presenter, or affiliated organizations. It should not be construed as investment, tax, legal, or other professional advice. Always consult a qualified professional regarding your specific situation before making any decisions.
