Investing in a 401(k) plan is a common way to save for retirement. It involves depositing a portion of the salary every month in a 401(k) account. However, to get the most out of 401(k), one needs to follow the right steps, which may not always be clear without prior research. So, one may end up making mistakes with their 401(k) plan that can leave them with not enough funds.

1. Ignoring the types of 401(k) account
In general, one has two options to consider—a traditional 401(k) and a Roth 401(k). There are significant differences between the two. For instance, with a traditional 401(k), the contributions are made before the tax is imposed. So, no tax has to be paid on the amount that goes into the 401(k) account. The money is taxed only when it is withdrawn, i.e., after retirement. On the contrary, in a Roth 401(k), taxes are imposed at the time of contributing the employee’s share. Understanding these differences is crucial for choosing the type of 401(k) account that aligns with one’s financial goals.

2. Not utilizing employer match programs
Many employers offer 401(k) matching programs. Here, employers contribute the same amount of money as the employees into the 401(k) accounts. So, not taking advantage of this means one is walking away from free money. For example, if one’s salary is about $75,000. Out of this, they contribute about 3% to the 401(k) every year, which would be $2,250. If the employer matches 100% of the employee’s contribution to the 401(k) plan, they will also contribute $2,250. So, a total of about $4,500 goes into the employee’s 401(k) account every year. So, eventually, the savings one can get from their 401(k) would amount to thousands of dollars if one chooses to stay in the same organization for several years.

3. Quitting before the vesting period ends
When employers match the 401(k) contributions, it is mandatory for the employee to stay with the company for a specific period so that they can get the entire contribution. This period is called the vesting period. If the employee leaves the organization before this period ends, they will not get the amount contributed by the employer into the 401(k) account. Only the money contributed by the employee would remain in the account. So, making this mistake means a loss of several thousands of dollars, especially if the 401(k) contribution has been quite high, both from the employee and the employer.

4. Not contributing enough
To get good returns, it is important to regularly invest enough money into the 401(k) plan as long as one is employed. Contributing an extremely tiny percentage of the salary or not contributing frequently would mean one will not have as much money as they could have had in retirement. After all, one can invest up to $22,500 into their 401(k) account in a year while employed. So, one should set a retirement savings goal and contribute enough money to meet that goal.

5. Not increasing the contribution amount
It is quite common to establish a 401(k) account and then forget about it. This is because money gets deducted from the salary automatically. Only when one is about to retire do they decide to check their 401(k) and find that it does not have nearly as much money as they expected, To avoid this outcome, it is crucial that one keeps track of their 401(k) contributions and considers increasing their contribution slowly over time, especially if there is an increase in the income. In fact, financial experts believe that it is important to save and invest approximately 15% of total pre-tax income. Increasing 401(k) contributions as the salary grows is a great way to add to retirement funds.

6. Not checking how the plan works
Usually, when one contributes a portion of the salary toward the 401(k) plan, it is invested in other financial products such as stocks and mutual funds. A mistake that one may make here is simply accepting the default investment options when signing up for the 401(k) plan. One may not pay much attention to where their money will be invested, the fees that will be charged, and how the investment fund is performing. Such a mistake can result in low returns on investment. To avoid this, it is crucial to look into the various investment options within the 401(k) plan. Besides, one must understand exactly how much they would have to pay as fees. If the fees seem too high, it is better to invest just enough so that one qualifies for an employer match program.

7. Withdrawing money early
It is not unusual for one to make early withdrawals from their 401(k) to meet unexpected expenses, say emergency medical bills or urgent home repair costs. But, withdrawing money often before retirement can cost one. For instance, withdrawing money from the 401(k) account before one turns 59 and half results in a penalty of 10%. This means that one will not only reduce the retirement savings but will also have to pay a penalty for withdrawing too early.