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 part one of this series, we covered the first five most common – and potentially costly – 401(k) mistakes we see investors and high-achieving executives make. Here are the last four.

#6: Withdrawing Funds Too Early Without Exploring Other Options

Many investors underestimate how expensive early 401(k) withdrawals can become.

In many cases, withdrawing retirement funds before age 59½ may trigger:

• Ordinary income taxes
• State income taxes
• An additional 10% early withdrawal penalty

As a result, the amount withdrawn from the account may need to be significantly larger than needed. Exceptions to the 10% additional tax may apply depending on the participant’s age, employment status, reason for the distribution, and type of account. These rules should be reviewed before assuming a penalty will apply.

Example

A hypothetical investor wants to put 40% down on a vacation home purchase and decides to tap into their tax-deferred 401(k) account for some of the down payment because they don’t have enough money in the bank for the entire down payment.

Because the funds are needed from a pre-tax 401(k), the actual gross withdrawal required could be much more than they need for the down payment due to estimated:

• Federal income taxes
• State taxes
• Early withdrawal penalties

For example, assume this home buyer needs $20,000 after applicable taxes and penalties. Let’s also assume the buyer was in an estimated 37% federal and 3% state tax bracket and is subject to a 10% penalty on the withdrawal since they were below age 59.5.

In this situation, the total estimated tax (37%+3%+10%) and penalty rate for early withdrawals (10%) is a whopping 50%. That means they would need to withdraw $40,000 to get the $20,000 they need after taxes and penalties.

In situations like this, it can be important to evaluate whether other funding sources or planning strategies may be more efficient before tapping retirement accounts prematurely.

The Hidden Costs: Lost Compounding Opportunity & Less Control of Future Tax Bracket

Early withdrawals can create another major cost that is often overlooked: lost long-term compounding.

Every $20,000 withdrawn is $20,000 that no longer has the opportunity to potentially grow over future decades for retirement. If that $20,000 remained invested for 30 years and earned an average annual return of 8%, it could potentially grow to approximately $201,252. That means a $20,000 withdrawal today could potentially reduce future retirement assets by more than $200,000 over time.

The impact can be even greater when funds are withdrawn from a Roth 401(k). Roth assets can be especially valuable in retirement because qualified withdrawals are generally tax-free.

Having access to tax-free retirement income may help retirees:

• Better control their tax bracket
• Reduce taxation on Social Security benefits.
• Lower Required Minimum Distribution (RMD) exposure
• Potentially reduce Medicare IRMAA surcharges, which are based on taxable income.

For many retirees, preserving Roth assets can become an important part of long-term tax-efficient retirement income planning. This illustration assumes a constant 8% annual return, annual compounding and no withdrawals. It does not reflect advisory fees, investment expenses, taxes, inflation or market volatility. Actual returns will vary, and an investor could have more or less than the amount shown.

#7: Missing Mega Backdoor Roth Opportunities

Many employees are unaware that some employer retirement plans allow for “mega backdoor Roth” contributions – an advanced strategy that can dramatically increase Roth savings. We’ve seen this feature available in plans at companies such as General Mills and Johnson & Johnson in recent years.

Why It Matters

Standard employee 401(k) contribution limits alone may not allow high earners to build Roth assets quickly enough. A Mega Backdoor Roth strategy (CLICK HERE to learn more) can potentially allow eligible participants to contribute tens of thousands more into Roth accounts annually.

This can create:

• Tax-free growth potential
• Potentially tax-free qualified withdrawals
• Greater tax diversification in retirement

What to Look For

Not all plans allow this strategy. Your plan generally needs to permit:

• After-tax 401(k) contributions
• In-service Roth conversions or rollovers

Many employees never realize these features exist within their plan documents.

#8: Having an Uncoordinated Investment Strategy

Another common 401(k) mistake is selecting investments without a clear strategy.

Many employees pick funds based on recent performance, familiar fund names, or a glance at risk scores, but never coordinate those choices with the rest of their financial plan.

What This Can Look Like

An uncoordinated investment strategy may include:

• Picking investments without a target allocation or long-term plan
• Failing to coordinate investment risk across multiple household accounts
• Two spouses owning very similar investments even though they are different ages and may begin RMDs in different years.
• Ignoring whether the account should be managed more aggressively or conservatively based on retirement income needs
• Failing to monitor and rebalance the account over time
• Missing changes to the plan’s investment menu, which can happen more often than many employees realize

Why It Matters

Your 401(k) should not be managed in isolation.

For example, if both spouses own similar large-cap stock funds across their 401(k)s, IRAs, and taxable accounts, the household may be far more concentrated than they realize. In other cases, one spouse may be closer to retirement and should have a different risk profile than the younger spouse.

Even if the original investment lineup was appropriate, the account can drift over time as markets move. Without periodic rebalancing, a portfolio may become more aggressive or more conservative than intended. Plan investment options can also change. Funds may be added, removed, replaced, or modified. If those changes are not reviewed, participants may miss better options or end up holding investments that no longer fit their strategy.

A coordinated investment strategy should consider your entire financial picture — including your age, retirement timeline, tax situation, income needs, spouse’s accounts, outside investments, and overall risk tolerance.

#9: Missing Opportunities to Use Pre-Tax Retirement Assets for Charitable Giving

A common retirement-planning mistake is leaving all pre-tax savings in a 401(k) without considering how those dollars could eventually support charitable goals. Qualified charitable distributions, or QCDs, cannot be made directly from a 401(k). However, an investor who is at least age 70½ may be able to roll an eligible portion of a former employer’s 401(k)—or complete an allowable in-service rollover—into a traditional IRA and then direct distributions from the IRA to qualified charities. When properly completed, the QCD is generally excluded from taxable income and may also satisfy all or part of the investor’s required minimum distribution.

One important point: QCDs are not charitable deductions; a QCD generally is excluded from income, but the donor generally may not also claim the distribution as a charitable deduction.

Why It Matters

Investors with charitable-giving goals may be able to potentially improve the tax efficiency of their pre-tax retirement dollars by giving directly from an IRA rather than withdrawing the money, recognizing taxable income and then making a personal charitable contribution. This can be especially valuable for taxpayers who do not itemize deductions or who would benefit from keeping adjusted gross income lower. The strategy may allow more of each pre-tax retirement dollar to reach the charity while preserving taxable cash or appreciated investments for other goals.

What to Look For

Determine if you are at least age 70½, have charitable intentions, and are eligible to move money from the 401(k) into an IRA. The plan must permit a distribution, which commonly occurs after separation from service but may also be available through an in-service rollover. The rollover should generally be completed directly from the 401(k) to the IRA, and the subsequent charitable payment must be made directly by the IRA custodian to an eligible charity—not paid to the investor first. QCDs generally cannot be directed to donor-advised funds, supporting organizations, or private foundations, subject to limited statutory exceptions for certain split-interest arrangements.

For investors already subject to required minimum distributions, additional sequencing rules may apply. A current-year RMD from a 401(k) generally cannot be rolled into an IRA, so the applicable plan RMD may need to be distributed before completing the rollover.

This planning should begin well before December. Adequate time is needed to evaluate rollover eligibility, run tax projections, determine if a rollover is in your best interest, compare QCDs with other giving strategies, open and fund the IRA, process charitable payments, and coordinate the recommendation with your accountant.

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

Many professionals and executives are surprised to discover how much opportunity may exist in their current retirement plan.

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.