Originally published February 2016. Last updated March 2026.
Setting up a 401(k) is a good first step. But a lot of people make mistakes with their 401(k) that quietly cost them tens or hundreds of thousands of dollars by retirement. Here are three of the most common.
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1. Cashing Out When You Leave a Job
This is the most expensive mistake on the list. When you leave an employer, you have options: leave the money in the old plan, roll it into your new employer’s 401(k), roll it into an IRA, or cash out.
Cashing out is almost always the wrong move. Here’s why:
- You’ll owe income tax on the entire withdrawal
- If you’re under 55 (or under 59 and a half for an IRA rollover), you’ll also pay a 10% early withdrawal penalty
- Your old employer is required to withhold 20% for federal taxes
- You lose years of tax-deferred compound growth
The numbers: $25,000 cashed out at age 35, assuming 8% average annual returns, would have grown to about $170,000 by age 65. After taxes and penalties on the early withdrawal, you’d walk away with roughly $17,000-$19,000 today. You’re giving up $170,000 for $19,000.
Instead, roll it over. An IRA rollover gives you more investment choices and the same tax-deferred growth. It takes one phone call to set up.
2. Not Contributing Enough to Get the Full Employer Match
If your employer matches 401(k) contributions and you’re not contributing enough to get the full match, you’re leaving free money on the table. Period.
A common match formula is 50% of your contributions up to 6% of your salary. On a $70,000 salary, that means if you contribute $4,200 (6%), your employer adds $2,100. If you only contribute 3%, you get $1,050 in matching. That’s $1,050 per year you’re giving back.
Over a 30-year career with investment growth, that difference adds up to six figures.
Your minimum contribution should always be whatever it takes to capture the full employer match. That’s a 50-100% instant return on your money before it even gets invested.
3. Setting It and Forgetting It
A lot of people pick a contribution rate when they start a job and never change it. Five years later, they’ve gotten raises but they’re still contributing the same dollar amount (or same low percentage).
Good practices:
- Increase your contribution by 1% every year. Many plans have an auto-escalation feature. Turn it on. You won’t notice 1% missing from your paycheck, but over 10 years, that’s a 10% increase in your savings rate.
- Direct raises toward retirement. When you get a 3% raise, bump your contribution by at least 1%. You still see a bigger paycheck, and your retirement savings grow faster.
- Review your investments annually. Your risk tolerance at 30 is different from your risk tolerance at 50. Make sure your allocation still matches your timeline.
The 2025 401(k) contribution limit is $23,500 ($31,000 if you’re 50 or older, $34,750 if you’re 60-63). If you’re nowhere near those numbers, incremental increases every year will get you closer.
FAQ
What should I do with an old 401(k)?
Roll it into an IRA or your new employer’s plan. Don’t leave it sitting in an old plan where you might forget about it, and definitely don’t cash it out.
How much should I contribute to my 401(k)?
At minimum, enough to get your employer’s full match. Ideally, 10-15% of your gross salary (including the employer match). If you can max it out at $23,500, even better.
Should I choose a traditional or Roth 401(k)?
If your employer offers both, consider splitting. Traditional gives you a tax break now; Roth gives you tax-free withdrawals later. Having both gives you flexibility in retirement. If you’re early in your career at a lower income, lean Roth. If you’re at peak earnings, lean traditional.
Schedule a free 20-minute consultation to make sure your 401(k) is working as hard as it should be.
R.L. Brown Wealth Management
106 W Vine St, Suite 300, Lexington, KY 40507
859.317.5889
