Top 401k Mistakes That Hurt Your Retirement

Hopefully, everyone who has access to a 401k is contributing to a 401k. To not do so is a mistake you don't want to realize when you're old and unwilling or unable to work. This post will discuss all the top 401k mistakes that hurt your retirement.

Let us be clear. The government isn’t going to save you. With a large Social Security funding shortfall, the government is having a hard time saving itself.

Further, thanks to a global pandemic and massive stimulus, the government has a huge budget deficit. Therefore, the government will probably adversely affect your retirement life by either raising the eligibility age to receive Social Security and Medicare, raise taxes or both!

Having contributed to a 401k and a Solo 401k since 1999, I've made plenty of mistakes that have likely cost me over $200,000 in lost appreciation over the years. My goal for this post is to help you not make the same 401k mistakes I made.

Top 401k Mistakes Hurting Your Retirement Portfolio

1) Not knowing your employee benefits

When you first get a job, you're anxious to provide value and bond with your colleagues. Due to your excitement, chances are high that you won't bother to read the employee handbook that describes all your benefits. 

It's very easy to overlook benefits such as health care, paid time off, sick leave, retirement savings plans, paid education, and sabbaticals when you are young because what do you care? You've got your whole life ahead of you to save for the future. It's hard to think about ever burning out at work because you've only just begun.

One of the first things you should do when you get any job is to thoroughly understand all your employee benefits. Once you've read your employee handbook, make an appointment with HR. Have them elaborate on every section of the handbook and answer follow-up questions.

Ask about your employer's 401k plan, vesting period, and company match percentage. Learn how to set up your 401k contribution. Then automatically deduct a certain amount from your paycheck or after each bonus.

When I was making a $40,000 base salary in Manhattan back in 1999, I only contributed $3,000 to my 401k that year. I had just started work in July (graduated in May) and was just thrilled to have a job. If I had studied my firm's 401k plan, I would have known I could have contributed a maximum of $10,500 in 1999.

Back then, I was so busy working 12-hour days. After the long day was done, I'd spend another several hours studying for my Series 7 exam. The last thing on my mind was contributing to my 401k plan. After a long evening, my classmates and I wanted to enjoy NYC's nightlife!

2) Not maxing out your 401k every year

If you do nothing else for your retirement, at least max out your 401k every year. Yes, it might seem daunting to max out a 401k when you're first starting out. However, remember before you started work you were even more broke as a student!

Maxing out your 401k is a habit you should accomplish every year. I promise you will be able to adjust your spending habits after you set up your automatic pre-tax 401k contributions.

Over time, as you earn more money, maxing out your 401k will get easier. Once you turn 50, you can contribute an extra $6,500 a year in pre-tax income into your 401k as catch-up contributions. In 10 years, you will be amazed by how much you've accumulated in your 401k.

Below is my 401k savings chart by age. I'm confident everyone who maxes out their 401k for the next 20 years will be millionaires. If you're not, you can blame the government.

401k Savings Targets By Age Guide - 401k mistakes

3) Not paying any attention to your investments

The world and your needs are changing all the time. As a result, it's important to stay on top of your 401k investments. It's worth rebalancing at least twice a year, even if only minor tweaks are made.

The goal is to review your 401k portfolio at least twice a year to make sure your asset allocation is congruent with your financial goals and risk tolerance. Your risk tolerance may be very different as a 25-year-old versus a 50-year-old who is burning out at work.

Back in 1999, everything was going great with tech and internet stocks on fire. Nobody could lose until the NASDAQ imploded one fateful day back in the spring of 2000.

After reading all about my firm's retirement benefits, I had been diligently maxing out all I could in a hyper-growth Janus Tech fund that could do no wrong. Then it blew up. I hadn't bothered with diversification, cash management, or buying bonds.

I paid the price, but luckily I didn't have that much money invested in my 401(k) at the time. It's good to learn from your mistakes when you're still young and poor! Below is a snapshot of a Personal Capital's free portfolio analyzer tool that gives you a snapshot of your asset allocation.

Personal Capital Investment analyzer
Sample Investment Analyzer by Personal Capital

4) Trading way too often

The flip side of not paying attention to your 401k is paying too much attention to you 401k.

It's been shown time and time again that trading in and out of securities is a bad idea. You will likely underperform your respective indices.

The time you spent trading your 401k is time you could have spent becoming a better employee. Getting promoted and paid is where the real money is for the first 15-20 years of your career.

Trading my 401k too much was my biggest problem. I worked in the Equities department of a couple of Wall Street firms. Stocks were all I thought about and talked about every day.

I couldn't help but trade my portfolio, like a bartender who can't help but sip on his concoctions until he gets a little too tipsy for his own good.

On some trades, I made a killing. On other trades, I underperformed miserably. At the end of each year I'd compare my gains to my losses, and most of the time the difference was negligible (i.e., under $20,000). For many years in a row, I'd reach Fidelity's rebalancing limit and get a warning. Thankfully, there was a trade limit; otherwise, I would have kept on going.

If you have trading tendencies, try and keep your rebalancing to once a quarter, max. The more you trade, the worse your performance in the long run. Don't let trading distract you from work.

5) Borrowing or withdrawing from your 401k

There is a reason why the government withholds taxes from us throughout the year. Humans cannot be trusted to do the right thing with money!

Can you imagine the chaos that would ensue if the government allowed its taxpayers to pay everything they owed at the end of the year? Half of us wouldn't come up with anything because we'd have spent all our money.

40% of us would probably fudge our taxes to the point where we'd argue to pay much less. Maybe only about 10% of us would actually be good boys and girls and pay 100% of what the government told us we owed.

Borrowing from your 401k puts a huge drag on performance. The only positive is that you are paying a high borrowing rate back to yourself. You also use after-tax dollars to pay back your 401K loan.

As the saying goes, “time in the market is better than timing the market.” If you permanently withdraw from your 401k, not only will you pay normal income taxes, you'll also pay a 10% penalty on your money.

Of course, if the choice is between death and borrowing from your 401k, then pillaging your 401k is a better course of action. But hopefully, no Financial Samurai reader will ever be that short of money, because, in addition to contributing to a 401k, everyone should also be saving in a taxable investment account as well.

As soon as you let yourself borrow from your 401k, the floodgates may open. You'll want to borrow every time there is an emergency.

Related: Only Petulant Fools Borrow From Their 401k

6) Not contributing once you've left your job

A job change is generally a stressful time. You could have lost your job due to a layoff or you could have found a new exciting job opportunity. Whether you are self-employed or a new employee, it's important to continue contributing to your 401k or other pre-tax retirement accounts.

When I left my job in 2012, I was feeling very content to finally get out of the rat race. I wanted to spend all my free time writing and traveling, so that's what I did. I didn't bother researching things such as the SEP IRA or Keogh 401k (solo 401k) until the very end of the year because I had already rolled over my 401k into an IRA. The last thing on my mind was contributing to my retirement because I was already retired. I wanted to spend my money, not save!

In retrospect, I made two 401k mistakes in 2012. The first mistake was not contributing the maximum $17,000 to my employer 401k.

I had left work in April 2012 and had gotten the last of my base salary in June 2012. If I had planned better, I would have upped my 401k percentage contribution from my base salary to get to the maximum $17,000 amount before I left. But I didn't because there were too many things going on. As a result, the most I contributed was about $8,500 to my 401k.

My second mistake was not opening a Solo 401k in 2012 and also contributing the 401k maximum of $17,000 from my online income. All told, I missed out on contributing $25,500 to my 401ks. At an 8% compound return, these 401k mistakes cost me $22,000 in lost profit over these past eight years.

7) Joining a firm with no 401k benefits

Only after you retire or become unemployed do you really start to appreciate company benefits. When I left work in 2012, I also left behind between $20,000 – $25,000 a year in company profit sharing. This company profit sharing was deposited directly into my 401k each year. Then, of course, I eventually had to start paying for full health care insurance premiums once my wife retired as well.

The type of companies that tend not to have any 401k or retirement benefits is startups. Joining a startup has become more popular over time. However, most startups fail or fail to exit big. Therefore, if you join a startup, not only are you likely getting paid a lower salary than you could get at an established firm, you're also likely foregoing any 401k benefits.

When you make your employment decision, definitely take into consideration the 401k profit sharing and other benefits. The company you join that doesn't have a 401k better have massive equity upside.

Below are the historical 401k contribution limits. Please also pay attention to how much the employer can contribute as well as the catch-up contributions once you turn 50.

Historical 401(k) Contribution Limits Up To 2020

8) Converting your 401k into a Roth IRA

This 401k mistake might not seem like a mistake to some. But I think it's a mistake for high income earners.

It's one thing to contribute to a Roth IRA if your marginal income tax rate is on the lower side or if you've already maxed out your 401(k). It's another thing to convert your 401k into a Roth IRA if you reside in one of the higher taxed states in the country and are in a top income tax bracket.

If you live in California, Wisconsin, New York, New Jersey, Connecticut, Pennsylvania, or Maryland, please consider delaying your Roth IRA conversion until after you move to a lower income tax state such as Florida, Wyoming, Washington, Nevada, Tennessee, or Louisiana. If not, you will be paying 3% up to 10% more in taxes than you would otherwise.

The greater your 401k's value and the higher your taxes, the more you should consider never doing a Roth IRA conversion. Simply rollover your 401k into a traditional IRA without paying taxes up front.

If you're a young buck in a low-income tax bracket who anticipates great earnings potential ahead, then converting your 401k into a Roth IRA makes more sense. Just know that as soon as you give up your free will, you might as well give up your freedom as a US citizen.

Relative to the private sector, the government is extremely wasteful. The more you pay in taxes, the more you will realize this truth.

See: Disadvantages Of A ROTH IRA: Not All Is What It Seems

9) Only relying on your 401k for retirement

If you want to retire comfortably, relying only on your 401k is a mistake. In the past, most company and government workers got pensions for life. Today, less than 15% of Americans get pensions.

The mistake some people with pensions make is not contributing to a 401k or taxable investment account because they think a pension is all they need. If their companies go belly up or if the government decides to reduce their pensions, these retirees will end up in a difficult situation.

Everyone must not only max out their 401k every year, but also build up a taxable investment portfolio equal to or greater than your 401k. On top of these two investment vehicles, everyone should also devise a way to make supplemental retirement income as well.

This is the new three-legged retirement stool: you, you, and you. You must count only on yourself to survive. If Social Security, a pension, and a rich aunt give you a financial boost, then wonderful! If not, then you'll still be just fine.

10) Paying high 401k fees

Do you know who are the richest fund managers in the world? They are those who not only gather the most assets but also charge the most in fees. Given that The Vanguard Group manages trillions of dollars, you might think the late founder, Jack Bogle, would have died a billionaire. Wrong. Before Jack died he revealed to the public that his net worth was in “the low double-digit millions.”

In contrast, hedge fund managers and all-star active fund managers are worth much more due to fees. For example, Steve A. Cohen of SAC Capital – who had one of his fund managers convicted of insider trading – got paid over $2 billion just in 2013.

The money management business is one of the best businesses in the world to get rich because it is so scalable. It doesn’t take a person any more brainpower to manage a $100 million portfolio than it does to manage a $10 billion portfolio. 

For 11 years, I never once looked at the fees I was paying in my 401k until I discovered Personal Capital in 2012. When I ran my 401(k) through Personal Capital's 401(k) Fee Analyzer tool, I was absolutely shocked to discover I was paying $1,700 a year in fees.

Due to the 401k fee analysis, I sold my Fidelity Blue Chip Growth Fund and bought a Vanguard Blue Chip Growth fund with much lower fees. Below is a snapshot of what my 401k portfolio looked like before I made the change.

Why don't more people contribute more to their 401(k)

11) Not taking your required minimum distributions

You must start taking mandatory minimum distributions from your 401(k) in the year you turn 73 or the year you retire. The age is up from 70.5 due to the passage of the SECURE Act and SECURE Act 2.0.

The minimum amount you must withdraw each year is calculated by dividing your 401(k) account balance by your longevity, as defined by an IRS longevity table. The required minimum will vary each subsequent year to reflect earnings and the fact that calculated life expectancy is reduced by 9 months. You can have your 401(k) administrator calculate your minimum each year.

If you fail to take your required minimum distribution, the IRS will impose a penalty tax equal to 50 percent of the required minimum distribution that wasn’t withdrawn. Further, if your required minimum distribution is too large, it may bump up your income tax or capital gains tax rate.

When you reach the age where you are able to withdraw from your 401k penalty-free, please do another round of financial planning for your golden years.

401k Mistakes Can Be Fixed

Live long enough and you'll make a lot of mistakes. The good thing is, you now know the most common 401k mistakes people make and how to avoid them.

Please don't waste your opportunity to contribute the maximum amount every single year. Stay the course and know that every 401k contribution makes your future retirement a little bit better. X-ray your 401k for excessive fees and keep track of your finances.

Build a retirement portfolio that generates a healthy amount of passive income. If you do, you will eventually start viewing your 401k as bonus money. At this point, you probably won't have a retirement worry in the world because you're also treating Social Security as bonus money too.

Readers, what are some other 401k mistakes you are aware of? Have you ever made any of these 401k mistakes?

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62 thoughts on “Top 401k Mistakes That Hurt Your Retirement”

  1. Dividend Power

    Most people don’t know how to use their 401(k) plan over the long-term. It is really not designed well for retirement since there is so much year-to-year fluctuation. Retire in the wrong year and that’s a few thousand dollars in withdrawals per year lower. Retire in a good year and that’s a few thousand dollar per year more.

  2. Something to watch for.

    The Biden campaign is suggesting a 26% refundable tax credit on 401k plans, rather than a straight deduction. Which means if you make less than 80k a year the government would subsidize your 401k, if you make more than that then you are going to be paying some level of taxes on your contributions.

    Someone at a marginal tax rate of 32% would essentially be paying 11.5% taxes on their contributions. Assuming the tax rate doesn’t go up and they can hold their retirement taxable income at the same level as when they were working, they will then pay 32% on everything they draw. Yes, this would be double taxation.

    I’ve heard he also endorses a suggestion for the gov’t to charge fees on 401k transactions.

    And all of this also avoids touching the one-percenters, as they tend to have their money in things like owning businesses and such, not in 401k plans.

    If he gets elected and if this gets enacted, another 401k rule would be don’t use a 401k if you and your spouse make much more than six figures or so because, running the numbers, it looks like it would be better to go straight to a brokerage account and just resign yourself to longer term capitals gains every now and again.

    No, I am not endorsing the other guy either. Just pointing out that 401k rules may be about to go back to the drawing board.

    1. This comment raises two alarm bells. Let’s dissect this comment. “The Biden campaign is SUGGESTING a 26% refundable tax credit on 401k plans, rather than a straight deduction. That means that the Biden campaign has not actually said that is what they will do.

      Then there’s this; “I’ve heard he also endorses a suggestion for the gov’t to charge fees on 401k transactions.” WOW, this is misinformation at its finest. A claim is made without ANY evidence to back this falsehood up.
      I come here to get solid financial advice, not to hear some drivel from some anonymous commenter with a political agenda.

    2. It’s rare that I fully disagree with Sam but for self employed people in the low to mid 6 figures it’s far better to max a solo Roth 401k, but forego the traditional 401k to get the maximum QBI and invest in a traditional non tax advantaged brokerage account in non dividend paying stocks like AMZN, PAYC, INSP, BRK.B, TSLA etc. A brokerage account is going to be taxed at ~19%-24% going in, and 15% on the gains going out vs. a ~19%-24% tax break going in but as ordinary income 32% or higher going out on all gains. Not to mention you’re not going to be subject to RMDs in a std brokerage account. If you’ve got a retirement horizon of 15 years or more – the brokerage account is definitely going to be better as the majority of your assets will be gains. Of course all of this assumes that dividend / cap gains tax rate remains relatively constant.

  3. Hey, was wondering what you thought about Lendtable and their product? I was looking into it myself but am not quite sure exactly how it works. Seems pretty useful for those who can’t afford to budget out their company match but I’m always hesitant with this stuff.

  4. I am a freelancer and have a solo 401k and want to contribute as an employer but am confused about the rules around how much I can contribute. Should I contact a CPA to figure out how much I can contribute? Also, do I need to have a business license to have a solo 401k?

  5. Thanks for the article. I have only put in 6% to my 401k each year (with company 5% match). I separately invest a large portion of my take home pay in a standard trading/investment account. I’ve tried to do the math to see if it’s better to be taxed now (Trading account) or lower my current income and be taxed more later (Putting more in 401k). You certainly recommend maxing 401k, so wanted to see if that is more for discipline reasons (forcing yourself to invest and not ‘cheat’ by spending more) or if it’s for tax purposes that investing in 401k instead of trading account defers gains/taxes into the future? Thanks.

      1. Thanks for the reply. I’m in the 24% bracket (married-jointly, but just on my income only). I’m 40 years old now, and had always elected to put my additional investment income (after my initial 6% in 401k) into my trading account to allow for more options, flexibility, etc… (stock choices, college savings for the kids). But I’m always looking for opportunities to save more and build more. I’ve had some salary jumps the last 2 years, and have also had a very positive 2020 in the stock market but will be taxed in full for taking short-term profits this year. So it has once again raised my awareness for how to best lower my taxable income and position myself well going into 2021 assuming next years numbers will be similar to this years.

      2. We are in the 22% bracket, and it still seems to make most sense for us to max. We have option of 2 401ks, a 457 and HSA, almost pushing us into a lower bracket.

        IIRC if we put in $100 into one of those, our take home per check only decreases $65.

  6. I suspect the hyper growth Janus Tech Fund that could “do no wrong” you were investing in in 1999 was Janus Global Technology, which as I recall was up over 200% in 1999 before things went south. I had invested in it too.

  7. I fully agree on not doing conversions until you are in a state with low to no income tax.

    Also, RMDs are taxed as income. If we don’t move before we hit 72, we will be paying upwards of half a million extra in state taxes between age 72 and 90. Better if we move in our early sixties and convert a lot to our Roths.

    Converting is also about as exactly neutral on tax benefit as it is possible to get. But only if tax rates don’t change. Since its a good bet that taxes are only going up, that does tip things towards converting as soon as possible. Although you need to make sure you can pay the required taxes with money that is not in a retirement fund, which can be limiting.

    The other advantage to converting is that (aside from being able to stick a bit more in retirement funds each year) it allows you to reduce your RMDs. This is important when your RMDs are going to drastically change your income and force you into a higher marginal tax bracket.

    The concerns right now include:

    1) The current federal tax rates are scheduled to go back up in 2025, or perhaps sooner, depending on the impending election.

    2) The federal gov’t may impose limitations on Roth conversions (before you can make yours).

    3) The federal government may decide to impose RMD requirements on Roth IRAs.

    4) The federal government may decide to stop allowing new Roth IRAs, in which case they will also forbid any further contributions to existing ones.

    5) Biden might get elected and then get the proposal he made on 22 Sep enacted, in which case . . . don’t get me started. Do your research. It’s poorly thought out and doesn’t even address the problem it’s meant to address.

  8. Haas said “On top of that, if you still have cash to spare, some companies offer what’s called post-tax contribution to the 401k. You can then convert that post-tax money to a Roth (you have to call the provider), where earnings can grow and be distributed tax-free if certain requirements are met.”

    “Post-tax contribution”…do you mean a Roth 401(k)?

    If so, I’m aware that you can’t go over the regular 401(k) limits. I called my provider.

    $19,500 (for you plus $6,500) = $26,000 total. You can direct where the funds go but you can’t go over $26,000.

    I would LOVE to add additional funds to my Roth 401(k) after maxing out my regular 401(k) ($19,500).

    1. Haas MBA Too

      It’s an additional perk that your employer has to offer. It’s more admin work for them and more fee to the provider. My wife’s company doesn’t have that option either.

    2. Haas MBA Too

      Not Roth 401k, but after tax contribution will be converted to Roth IRA. Even though the contribution is treated as after tax, the growth / earnings will be treated as pretax.

  9. My last employer provided a 401k match with the employer’s stock. The company stock consistently underperformed against the S&P 500, so I got in the habit of rebalancing and selling this matched portion of my portfolio every month. Fellow colleagues were not even aware the company match was being placed into the company stock. They never rebalanced which lead to large losses over the years compared to the broad market gains.

    Understand not just how much is being matched by the employer, but how it is being matched.

  10. Just pointing out that Oregon is not a low income tax state… it is among the highest in the nation and only mildly progressive.

  11. I have a small business with 7 employees. How would I be able to contribute the extra $36,000 as the employer to my 401k plan? Any advice would be greatly appreciated.

    1. You wouldn’t unless your business is highly profitable and your competition is poaching your employees away and you want to remain competitive. But if you want to, you can just contribute profit sharing to their plans.

      1. Ok thanks for the quick reply. I’m assuming this is because I cannot adjust the profit sharing contribution between me and the employees so we all get the same percentage?

  12. FIRE walk with me

    12) Rolling your 401k from a previous employer into a traditional IRA. Doing so prevents high-earners from being able to do back-door Roths.

    1. Fire – rolling a 401k into a traditional IRA is fine. High earners can still use the back door. High earners can convert a traditional IRA into a Roth IRA

      1. FIRE walk with me says

        Hi Alex,
        Unfortunately all IRAs are considered in aggregate for purposes of Roth conversions. This means that if you roll a (pre-tax) 401k into a traditional IRA and then want to contribute (post-tax) money to a traditional IRA, you can’t do so without paying taxes on some of the rollover portion.

  13. Great post, thanks Sam.

    I’m always surprised when people don’t take full advantage of employer matching. Looks like they need to read this and understand the long term ramifications, both through the loss of long term gains and not building solid habits.

    Although, I’m definitely guilty of not maximising my retirement accounts. Definitely could contribute more and secure more tax benefits, and as you e highlighted, it helps build great long term habits, got me thinking about upping my contributions!

    1. Just do it. Sam posted something a long while back (years ago I believe) about just ramping it up to the max for a pay cycle to see how it feels. I think if you just jumped in you would realize it’s not that much different (depending on your base salary of course). However, the long term benefits of tax deferral and compounding growth makes it a no brainer. If you aren’t maxing now you are wasting years of growth. Don’t wait ten years and lose all that time. As I’m sure you have heard and/or seen before, you can’t make up for time and interest with more cash all that easily. So start now, get on cruise control and forget about it. Consider it a deferred bonus plan you are holding with yourself.

      Looking at even a 5% gain over 40 years of maxing and you could be somewhere in the $2M range. Get your SO to do the same, and you could gain double.

      Just max it, and forget about it. If you have other great ideas to build your net worth do it with after tax dollars, don’t waste the pretax opportunities. You don’t really get that many with a W2 income so use them all.

  14. How about investing in your employers stock inside your 401k?

    This was probably my biggest mistake. Luckily it was only a 10% allocation as the investment has traded sideways for over 10 years.

    1. It all depends on how bullish you are on your business. If you are bullish and you can buy your company stock at a discount, I say why not.

      You should only work at a company you’re positive on anyway. If you’re not, I would move on.

      1. Trading too often. I owned PayPal. Sold it and bought it back at a higher price. This taught me two lessons. One, never sell unless I have a compelling reason. Two, when I see my mistake correct it immediately. Even though I bought it back at a higher price, I have made money by holding it.
        Commission free trading is a dark place. More than once I traded because there was no fee.
        I now know it will take 3 to 5 years holding a stock before I make money. Never, ever sell my winners. Add to positions as the stock goes up. Not as the stock is going down. Why would I want to buy more shares of a stock which is going down?
        Dollar cost averaging as a stock goes down is a losing game.
        The problem with investing is it is too simple. Buy the best. Hold it and forget about it. That’s it.

        1. disagree on your one point…

          “Why would I want to buy more shares of a stock which is going down?”

          I think that depends on the situation as a whole, and likelihood of the stock going back up. With your logic, I assume if you went to a store and someone offered an item with a 10% discount, you would say, “No thanks I’ll pay the full freight…”

          If you can get in on a lower price going along with your buy and hold method, then you should be looking to buy when the price is lower.

  15. There is something I was reading within the past year or so that discussed portfolio drift and rebalancing. How it is parroted immensely in the retirement/investment industries, but that it’s impacts is minimal and re-balancing can actually be detrimental to you portfolio(s). Unfortunately, I cannot find the article as it also analyzed drift of a portfolio in various increments over a 75-100 year period up through the 2018 or so. I don’t recall specifics around the portfolio construction either, but it was interesting read. IF I remember correctly, the results of the analysis concluded that rebalancing on a set schedule 1-4 times per year performed worse than allowing the portfolio to just drift and adjusting allocation at a specific age.

    Either way, rebalancing at 2 times per year could be overkill. All of this is going to be predicated on your situation and whether you have new money being invested or if you are drawing down your accounts at this point. You’re style of investing is going to matter as well, because a sector investment strategy based on business cycle will be different compared to the FOMO FIRE individuals living in a van down by the river who own 2-3 broad index funds.

    The other approach would be to look at the new money being contributed and adjusting that investment allocation instead for active accounts (i.e. you are not drawing down the account). The idea allowing for winners to ride with a lower cost basis per unit and you purchasing slightly shifting to other investments.


    In a very simplistic view, if you say have a 50/50 split of Tech and Not-Tech. If Tech is doing great and now the portfolio has drifted to 55/45, Tech/Not-Tech, then it would make more sense to shifting new contributions to being more heavily to Not-Tech rather than rebalance. Otherwise, you rebalance back to 50/50 and continuing investing new money at the same allocation. By doing this you have effectively sold off some of your “winner” that was at a lower cost basis to buy Not-Tech, then you are turning around and continuing to buy Tech at a higher price.
    Even though the accounts may be tax advantaged, cost basis is still important at an income level for dividends. You would rather own $100 in shares of a FAANG stock at $50.00 a share cost basis than at $100 cost basis per share, if given the choice.

    1. Sure. The point is to at least do an analysis of your portfolio at least twice a year. I review my portfolio at least once a month, partly because I enjoy the process.

  16. Regarding rule number 5, one oft-cited reason against borrowing against your 401k is because you are paying back with after tax dollars alluding to being taxed twice. Accurate, however almost any loan you take out is paid back with after tax dollars, so I don’t see that as a reason to discount taking a loan from your 401k. I would rather pay myself interest with after tax dollars than paying a lender with after tax dollars. The main consideration IMO is missing out on market performance (good and bad) during the life of the loan.

    1. Yes, at least one pays back themselves. However, borrowing from a 401k to pay for “emergencies” is not a wise move. It can turn it into a bad habit. It’s best to compartmentalize various financial accounts.

      1. Your point is well taken that it is not a tool that should be abused or used without careful consideration of the opportunity cost. The same could be said about taking out credit cards. Both, if used thoughtfully, are available tools nonetheless.

        Several years ago, I was not in a position to have a sufficient down payment on a home. So I made the calculated decision to take a 401k loan for the down payment on a modest home. I was able to buy the home, avoid PMI, get a more favorable interest rate (due to lower LTV), was now able to itemize instead of take the standard deduction (before the law changed) and paid myself back 4.1% interest rate over 4 years. I also continued to max out my 401k and Roth IRA while servicing the loan and building home equity.

        Now, given market performance, the precipitous decline in interest rates, and appreciation in home prices, hindsight says I would’ve been better levering up. But that hindsight is a tricky thing…

    2. Agree with those saying you miss out on the opportunity cost of market returns for the money taken out of your 401k for a loan. However, there is no double taxation, which is a common misperception. The money you borrow from the 401k was not initially taxed. You are still only paying tax on the “contribution” that is returned to the 401k one time.

      1. The “double” taxation a lot of people point to is that you repay the loan with after tax income, and then your 401k is taxed upon distribution. So, technically, yes, taxed twice. Many people view this as having lost the benefit of the tax advantaged contribution. However, any loan you take will paid back with after tax dollars. Even if you borrowed money from mom and dad, you would be paying them back with after tax dollars.

  17. My biggest mistake wasn’t really preventable, I worked in the era before 401K’s became widely available so while I maxed my 401K every year I had one, they didn’t practically exist the first ten years of my career. I still had well over a million in the account by the time I retired slightly early but I would have had over two million if I could have started in year one of my job. I was on the committee that over saw our retirement plans, including the 401K and I can tell you in the early days committees weren’t aware of index funds or low fee investments. That came a few years later. Basically we were just employees and managers with no special training and the guidance provided by ERISA was nonexistent. Fortunately we went to some training and figured it out pretty quick, which certainly helped our employees who participated grow much larger accounts. But it really killed me to see people borrow to buy new pickup trucks, we are in Arkansas. That stopped both their ability to contribute and the company match until the loans were paid in full. It was just crazy.

  18. Sam, great post. Many books and pundits talk about dollar cost averaging for contributions, while recently a contact of mine said that is subpar advice and lump sum contribution approach early each year is better because it gives your money more time to grow. What are your thoughts?

    1. JP,

      For the last 5 years I’ve funded my 401k fully the first week of January. I have found that it is worse than dollar cost averaging. 2 out of the 5 years I’ve actually bought at a higher price than the S@P ended up at the end of the year.

  19. Making by in Hawaii nei

    Great article as always. Long time follower of financial samurai. As with most of your publications 90% is relative to most people while 10% is skewed to higher income earners. Married couple in early 40’s living in Hawaii making a $240k and barely living a lower middle income lifestyle here on Oahu. My wife and I have been maxing out 401k most of our career, following your car buying principles even before it was ever published ( only bought 1 new car ever Nissan Rogue), contributed to Roth IRA to the max and still unable to not make mistake #9 to the full extent. I find it practicality unattainable to have an after tax investment acct higher than the 401k. Granted we will not have any pension I have tried my best to invest in an after tax acct (acct is 10% of maxed out 401k balance). I think you may need to revisit that recommendation. It’s a pie in the sky in the sky suggestion.

    1. OK, I can revisit the recommendation to try to fit your situation better.

      These are just goals that I’ve set out for readers, just like how a coach gives me goals to work on. I might not achieve them, but at least I’ll work hard to try to achieve them. Even if I don’t achieve them, I’ll be much better off because I tried.

  20. Sam you should do an article about the turbo charged 401k option of pre and post tax and how to manage that. I would be happy to help author. I wish this option were available to me for the majority of my working career vs just the past few years. It is a game changer and could fund the majority of ones retirement nest egg if done right. Thanks.

  21. Frugal Bazooka

    That warm feeling is me appreciating this post being about financial advice – and great advice at that. The 2 biggest mistakes I made were similar: 1. not realizing I had a 401k avail for 2 flipping years 2. Not maxing it out every year
    The good news for anyone as idiotic as me is I was able to save/earn over 7 figures using the 401k over a 20 year period. While our govt is becoming less and less interested in helping the average person build wealth, the 401k is the one program that actually encourages us and enables us to leave poverty behind. It’s a shame more people don’t use it to its full potential.
    Any thoughts on the Biden proposal to end or re-tool 401k?

  22. Haas MBA Too

    Here’s another tip.

    When you hit 50 as I did this year, you can do a catch-up contribution amount each year, in addition to the yearly maximum. So starting this year, instead of merely maxing out at $19,500, I’ve added another $6,500.

    On top of that, if you still have cash to spare, some companies offer what’s called post-tax contribution to the 401k. You can then convert that post-tax money to a Roth (you have to call the provider), where earnings can grow and be distributed tax-free if certain requirements are met.

    1. Good tip! It’s in the historical 40-k contributions chart, but I added working around it now.

      10 years of an additional $6,500 a year pre-tax is good money.

      And hopefully, people in their 50s are in their highest earning power years and can more easily contribute $26,000 a year.

  23. Another mistake in borrowing from your 401k is not considering that you pay interest with after-tax dollars, in essence paying taxes twice. Also you will miss out on the market return of the principal borrowed.

  24. Great article sam!! I’m thinking about maxing out my IRA 6500 I believe and leaving my 401k contribution at 5% (company match first 3%) . The funds on my 401k aren’t too great and I believe I can do better choosing my own. I’m making 81000/ yr TX , and I’m in my late 20s. What do you think about this strategy?

      1. Thanks!! I just started this job in august so I’m finally eligible to contribute. I’m debt free and am just paying monthly rental costs so I’ll be able to do that.

  25. I was guilty of mistakes #1 and #2. I didn’t sign up for a 401k right when I became eligible but at least I did by the end of the first year or two. It was so long ago my memory is a bit fuzzy. But I definitely remember not maxing it out for years. At least I wasn’t accumulating debt during that time. Once I finally started maxing out my contributions it felt so great and really made a difference in the growth and compounding of my returns.

    Your list of 401k mistakes is great! I didn’t expect there to be as many as 11. That’s a great list thanks!

  26. What do you think of contributing to a Roth 401(k) instead of a Traditional one? I live in Pennsylvania. When I moved here after selling my house in Florida, I changed to a Roth 401(k) because regardless, Pennsylvania is going to tax it. As of late though, I have gone back to Traditional to bring my income down. Since you mentioned Roth conversion as a potential mistake, I thought I’d ask.

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