Financial Planning, Retirement, Taxes

9 Costly 401(k) Mistakes High Earners Often Overlook – Part 1

Posted on by Brian Lahr
24
Aug

For many professionals, the 401(k) is the cornerstone of their retirement plan. Yet even high earners and seasoned executives often overlook opportunities and risks that can significantly impact long-term wealth.

The reality is that maximizing retirement outcomes involves much more than simply contributing to your plan each year. Tax strategy, diversification, contribution timing, beneficiary coordination, and advanced planning opportunities can all play a major role.

In this post, we’ll cover the first five most common – and potentially costly – 401(k) mistakes we see investors and high-achieving executives make.

#1: Missing Net Unrealized Appreciation (NUA) Opportunities on Company Stock

If you own appreciated company stock inside your 401(k), failing to evaluate a Net Unrealized Appreciation (NUA) strategy could result in a substantial missed tax-saving opportunity.

This is especially relevant for long-term employees and executives at companies with significant stock appreciation.

What Is NUA?

Normally, distributions from a traditional 401(k) are taxed as ordinary income. However, under the NUA rules, eligible company stock may instead receive more favorable capital gains tax treatment.

Here is the key difference:

  • The original cost basis of the stock is taxed as ordinary income.
  • The appreciation above that cost basis may qualify for long-term capital gains treatment.

For high-income retirees, this can potentially save tens or even hundreds of thousands of dollars in taxes.

Example

Suppose you accumulated:

  • $100,000 cost basis in company stock
  • Current market value of $500,000

Without NUA:

  • The entire $500,000 in company stock distribution could eventually be taxed as ordinary income.

With NUA:

  • Only the $100,000 (plan’s cost basis) is generally taxed as ordinary income when distributed.
  • The NUA portion ($400,000 of appreciation) may qualify for long-term capital gains rates when shares are sold.
  • Appreciation that occurs after distribution may receive short- or long-term treatment, depending on the post-distribution holding period.
  • Other factors may include state taxes, the net investment income tax, and a possible early-distribution tax on the taxable basis.

That difference can be enormous. For example, paying an extra 10% in taxes due to missing an NUA tax-savings opportunity on $400k of appreciated stock gains could cost an investor $40,000 in unnecessary taxes.

Unfortunately, if the wrong rollover decision is made, an NUA opportunity could be permanently lost. It’s important to evaluate the NUA strategy before initiating a rollover.

How Can You Determine Whether NUA Planning May Help?

The first step is to determine if you hold stock in your 401(k) account or if it is listed as an investment option. If so, NUA planning might be an opportunity.

An NUA strategy generally also requires:

  • A qualifying event and satisfaction of applicable lump-sum distribution rules.
  • Distribution of the employer securities in kind to a taxable brokerage account.
  • Careful handling of the plan’s remaining assets.
  • Completion of the relevant distributions within the required period.

Based on work we’ve done with corporate executives and directors in the past, along with a recent online search, it appears that many major MN employers may allow company stock to be held in a 401(k) plan or ESOP (Employee Stock Ownership Plan), including, but not limited to:

  • United Health Group
  • Target
  • Best Buy
  • Medtronic
  • S. Bancorp
  • General Mills
  • 3M
  • Xcel Energy
  • Ecolab
  • Ameriprise Financial
  • Hormel Foods
  • Trane Technologies
  • Polaris
  • And more

If you work at one of these companies, it’s important to note that plans can change over time and that you should always review your 401(k) plan’s current document to determine 1) if company stock can be held in a retirement plan and then 2) if an NUA opportunity might exist.

We can help you review your plan documents to determine if your plan allows for NUA tax minimization opportunities.

#2: Neglecting Roth vs. Pre-Tax Tax Planning

One of the biggest mistakes we see is treating retirement contributions as a “set it and forget it” decision.

Choosing between Roth and pre-tax 401(k) contributions should ideally involve ongoing tax planning and income projections.

The Wrong Question

Many investors ask:

“Do I want a tax deduction today?”

The better question is:

“Where will I likely pay less tax over my lifetime?”

Why This Matters

Depending on your situation, future tax rates may actually be higher due to:

  • Large retirement account balances
  • Pensions
  • Required Minimum Distributions (RMDs)
  • Social Security taxation
  • Future tax law changes

In some cases, Roth contributions can create significant long-term tax savings – even if they increase taxes slightly today. In other situations, pre-tax contributions may still make more sense.

A 50/50 election may feel diversified, but it should not be treated as an automatic answer. The appropriate mix may range from entirely pre-tax to entirely Roth—or a combination—depending on current and projected marginal rates, cash flow, retirement income, filing status, and future planning opportunities. The key is running a projection analysis instead of guessing.

Recent Changes Are Shifting the Conversation

Recent legislative changes and strong market performance are also influencing retirement contribution strategies for many higher-income professionals.

Under SECURE 2.0, many higher-income earners age 50+ who make catch-up contributions will eventually be required to direct those catch-up contributions into Roth 401(k) or Roth 403(b) accounts rather than pre-tax accounts.

The IRS released final guidance outlining these rules and implementation details for employers and retirement plans. Read the IRS guidance on Roth catch-up contribution rules.

Beginning in 2026, certain participants whose prior-year FICA wages from the employer sponsoring the plan exceeded $150,000 must generally make age-50 catch-up contributions on a Roth basis if the plan permits catch-up contributions. The threshold is indexed and may change in future years.

At the same time, several years of strong stock market appreciation have left many investors with significantly larger pre-tax retirement balances than they originally anticipated. As a result, future Required Minimum Distributions (RMDs) and projected retirement tax exposure may also be increasing.

For a growing number of clients, these factors have shifted the analysis more heavily toward incorporating Roth contributions and broader tax diversification strategies into their long-term retirement planning.

However, every situation is different, which is why tax projections and personalized planning remain critical.

#3: Owning Too Much Company Stock in Your 401(k)

Many employees gradually accumulate large positions in employer stock over time – especially when matching contributions or stock purchase plans are involved.

While loyalty to your company is understandable, concentration risk can become dangerous.

The Risk

Your income, bonuses, benefits, and retirement savings may already depend heavily on your employer’s success. If company stock falls sharply near retirement, the financial impact can be severe. History has repeatedly shown that even large, respected companies can experience sudden declines.

A Common Scenario

An employee nearing retirement may believe:

  • “This stock has always performed well.”
  • “I know the company.”
  • “It will recover.”

But a major downturn shortly before or during retirement can permanently damage a retirement plan due to sequence-of-returns risk. Diversification matters – especially as retirement approaches.

#4: Missing Company Matching Contributions

Employer matching contributions are one of the most valuable benefits available in many retirement plans. Yet employees frequently leave money behind. There are two common ways this happens.

Scenario #1: Not Contributing Enough

Suppose your employer matches:

  • 100% of the first 6% of pay

If you contribute only 4%, you may be giving up part of the available match; that is essentially turning down free compensation.

Scenario #2: Maxing Out Too Early Without a True-Up Match

This issue is less well known but can be very costly for high earners. Some employers only apply matching contributions on a per-pay-period basis.

If you max out your contributions early in the year, you may stop receiving matching contributions later in the year unless the plan offers a “true-up” provision.

Example

Assume:

  • Salary: $300,000
  • Employer match: 6% per pay period
  • Employee aggressively maxes out 401(k) contributions by June.
  • Employer does NOT offer a true-up match.

Result:

  • No employee contributions occur during the second half of the year.
  • Employer matching contributions may also stop during that period.
  • Thousands of dollars in matching contributions could be missed.

This is a surprisingly common and potentially very expensive mistake for higher-income earners, executives, and strong savers whose plans do not provide a true-up match.

#5: Forgetting to Update Beneficiary Designations

Your 401(k) beneficiary form often overrides instructions in your will or trust. That means outdated beneficiary designations can create serious unintended consequences or unnecessary stress.

Common Problems

We often see:

  • Former spouses still listed
  • Children omitted
  • Trusts not coordinated properly.
  • Estate plans updated, but retirement accounts are forgotten.

Beneficiary reviews are especially important after:

  • Legacy vision changes (e.g., percentage you want going to individuals and charity)
  • Marriage
  • Divorce
  • Births
  • Deaths
  • Estate plan document updates
  • Major wealth changes

This simple oversight can create confusion, delays, family conflict, and unintended asset transfers.

A Smarter Approach to Retirement Planning

A successful retirement strategy involves much more than investment selection. The most effective plans often integrate:

  • Tax planning
  • Retirement income strategy
  • Roth conversion analysis
  • Diversification
  • Estate coordination
  • Employer benefit optimization

In the next post, we’ll cover four more mistakes:

  • Withdrawing funds too early without exploring other options
  • Missing Mega Backdoor Roth opportunities
  • Having an uncoordinated investment strategy
  • Missing opportunities to use pre-tax retirement assets for charitable giving

Ready for a Second Opinion?

At One Life Financial Group, we help professionals, executives, and retirees make more informed decisions around retirement planning, tax strategy, and employer benefits.

Our team works with clients to identify opportunities that may otherwise be overlooked – including advanced strategies involving company stock, Roth planning, retirement income design, and tax-efficient wealth management.

If you’d like a second opinion on your 401(k), retirement strategy, or overall financial plan, we’d welcome the opportunity to help.

Schedule a conversation with our team to explore whether your current plan is well aligned with your long-term goals.

Important Disclosures

Advisory services are offered through One Life Financial Group, Inc., an Investment Advisor in the State of Minnesota. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. One Life Financial Group, Inc. does not provide tax or legal advice. Confirm any changes to your tax & legal strategies with your accountant and attorney prior to making them to ensure they work as intended. Investments are not guaranteed and may lose value.

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.

Sources

Best Buy States that participants may direct contributions and company matching contributions into the Best Buy Co., Inc. Stock Fund.
Medtronic Current Medtronic retirement-plan filing. The plan includes an ESOP component and company ordinary shares as a plan investment.
U.S. Bancorp Current Form 11-K for the U.S. Bank 401(k) Savings Plan. The filing establishes that U.S. Bancorp securities are held through the registered plan, although the stock-fund details may be contained in an incorporated exhibit.
General Mills States that the General Mills Company Stock Fund is available to plan participants and consists primarily of General Mills common stock.
Xcel Energy States that plan assets invested in Xcel common stock are held in the Xcel Energy Stock Fund. It also says participant distributions may be made in Xcel common stock or cash.
Ecolab States that the Ecolab Savings Plan and ESOP contains a separate ESOP account invested in the Ecolab Stock Fund.
Ameriprise Financial Current Form 11-K expressly identifies the Ameriprise Financial Stock Fund as an investment under the Ameriprise 401(k) Plan.
Trane Technologies States that the retirement-plan fund invests in ordinary shares of Trane Technologies plc.
Polaris Current filing reports Polaris common stock held inside the Polaris 401(k) Retirement Savings Plan.
Polaris especially clear prior-year filing Specifically states that plan investment options included Polaris Inc. common stock. It also discusses transfers from the separate Polaris ESOP.
3M This identifies the qualified plan as the 3M Voluntary Investment Plan and Employee Stock Ownership Plan.

A separate 3M filing refers explicitly to the 3M Stock Fund:

This is good evidence that a 3M Stock Fund exists within the underlying VIP investment structure, but current employees should review the latest summary plan description to confirm if they are able to invest into 3M stock within their company retirement plan.
Hormel Foods The page shows current Form 11-K filings for Hormel retirement plans, including the Hormel Foods Corporation Tax Deferred Investment Plan.

This supports that Hormel maintains SEC-registered employee savings plans associated with employer securities. However, participants should review the latest summary plan description to confirm if they are able to invest in Hormel stock within their company retirement plan.
Target The publicly available Target summary plan description previously identified a Target Corporation Common Stock Fund:

Because this is not a current SEC-hosted source, participants should review the latest summary plan description to confirm if they are able to invest in Target stock within their company retirement plan.

Target plan documents have historically identified a Target Corporation Common Stock Fund. Current availability should be confirmed from the participant’s plan statement or current investment menu.
Brian Lahr