Up to one in four American workers is leaving free money sitting on the table every single paycheck – not through bad investing, not through overspending, but by contributing just slightly less than their employer requires to trigger a matching contribution. Research by Financial Engines examining 4.4 million retirement plan participants found that 25% miss out on the full company 401(k) match by not saving enough. That gap quietly represents one of the most common and costly 401(k) mistakes to avoid, and it doesn’t require a market crash or a risky decision to happen. It just requires inaction.
The rules around 401(k) accounts have grown considerably more complex in the past few years. The SECURE 2.0 Act, signed in late 2022, has been rolling out significant changes through 2025 and 2026 – changing contribution limits, adjusting catch-up rules based on age, altering when you must start taking withdrawals, and even shifting how certain high earners must make those catch-up contributions. At the same time, the IRS has continued to flag a specific set of recurring errors that cost retirement savers real money, both in penalties and in lost growth. Some of these errors cost hundreds of dollars. Some cost tens of thousands. A few can wipe out the tax-advantaged status of an account entirely.
Most of these 401(k) mistakes to avoid aren’t complicated in hindsight. They fall into patterns: missing a deadline, misreading a rule, or not knowing that a rule changed. The eight mistakes below cover the specific errors the IRS flags most often – and what each one actually costs you.
1. Not Contributing Enough to Get the Full Employer Match
According to Fidelity’s latest retirement analysis, average 401(k) and 403(b) account balances continue to trend upward, with 401(k) balances up more than 11% over Q4 2024. Participating and optimizing, though, are two different things. The IRS warns Americans about common retirement savings errors, and missing the employer match ranks among the most frequently cited. The general 401(k) plan gives employees an incentive to save for retirement by allowing them to designate funds as 401(k) funds and thus not pay taxes on them until retirement age – but if you don’t contribute at least enough to capture the full employer match, you’re forfeiting compensation you’ve already earned the right to receive.
The math is straightforward. If your employer matches contributions dollar-for-dollar up to 3% of your salary, and you contribute only 2%, you’re getting a 2% match instead of a 3% match. On a $70,000 salary, that’s $700 a year in missed employer contributions – before compounding. The typical employee who doesn’t receive the full match leaves $1,336 of potential money on the table each year, which can amount to as much as $42,855 over 20 years with compounding. TheStreet noted that roughly half of all private-sector workers are completely excluded from compound retirement growth through workplace plans – making the match for those who do have access all the more critical to capture. The fix is one conversation with HR: find out your plan’s match formula, then set your contribution percentage at least to the threshold that triggers the full match.
2. Over-Contributing and Triggering a Double-Tax Hit
Most workers worry about not saving enough. Far fewer think about what happens if they save too much. But over-contributing to a 401(k) is a real mistake with a genuinely painful consequence: the excess amount gets taxed twice. According to Fidelity, more than 85% of 401(k) plans offer some type of employer contribution – which means millions of workers are navigating match formulas and contribution limits simultaneously. If you defer more than your plan allows, your excess deferrals are treated as income in the year they are made, and then taxed again at distribution. The IRS collects on the same dollars at two separate points in your life.
The IRS allows you to contribute up to $24,500 in 2026 for workers under age 50, according to the IRS. Multiple-job holders face the highest risk here. If you have access to multiple 401(k) plans through different employers, you are still limited to the total employee contribution cap across all plans combined – not a separate limit for each plan. Someone working two jobs and auto-contributing to both can easily exceed the ceiling without realizing it. If you hold more than one employer-sponsored plan in a calendar year, add up your combined contributions before year-end and correct any overage before the April 15 deadline to avoid the double-tax trap.
3. Missing Catch-Up Contributions You’re Entitled To
Catch-up contributions exist specifically for workers in the final stretch before retirement, and a surprising number of eligible people never use them. If you’re age 50 or older, the IRS allows you to make contributions above the standard limit – bringing the total to $32,500 in 2026 for those in the standard catch-up bracket, according to Fidelity’s contribution limits page. That’s an extra $8,000 per year sheltered from current taxes, growing in a tax-deferred account.
For workers aged 60 through 63, the opportunity is even larger. If you’re in that age window, you can contribute up to an additional $11,250 as a super catch-up contribution – bringing the annual ceiling to $35,750. This provision, introduced under SECURE 2.0, is one of the most underused tools in retirement planning. Many employer plans have adopted it, but not all. If you’re in that age window, contact your plan administrator directly and ask whether the enhanced catch-up limit is available in your specific plan. If it’s not yet offered, asking may accelerate adoption.
4. Cashing Out Early and Paying a Double Penalty
Financial emergencies happen, and when they do, a 401(k) balance can look like the obvious solution. For most people under 59½, it’s one of the most expensive decisions they can make. Pulling money out of a 401(k) before age 59½ means paying a 10% early withdrawal penalty on top of income taxes owed, as outlined by the IRS. If you’re in the 22% federal tax bracket, that’s effectively a 32% haircut before you see a dollar of the withdrawal. On a $20,000 withdrawal, you’d owe $6,400 in combined penalties and taxes – in addition to permanently losing the growth that money would have generated.
There are narrow exceptions – certain medical expenses, disability, and a handful of other qualifying hardships – but general financial strain doesn’t qualify. Any taxable portion not rolled over is subject to that 10% additional tax if you’re under age 59½, according to the same IRS guidance. Before touching retirement savings early, explore a 401(k) loan first (covered in item 7 below), check whether your plan has adopted the SECURE 2.0 emergency withdrawal provision allowing up to $1,000 penalty-free per year, or consider whether a home equity line or personal loan carries a lower total cost than the penalty and tax hit of an early 401(k) withdrawal.
5. Botching a Rollover and Creating an Accidental Taxable Event
Changing jobs is one of the most common triggers for a 401(k) rollover, and it’s also one of the most common sources of an accidental tax bill. The IRS distinguishes between two types of rollovers, and the difference between them carries real financial consequences. In a direct rollover, you ask your plan administrator to make the payment directly to another retirement plan or IRA. The administrator may issue your distribution in the form of a check made payable to your new account, and no taxes will be withheld from your transfer amount, according to the IRS. The money moves from one institution to another without passing through your hands.
An indirect rollover works differently. Any taxable eligible rollover distribution paid to you from an employer-sponsored plan is subject to mandatory income tax withholding of 20%, even if you intend to roll it over later. If you roll it over and want to defer tax on the entire taxable portion, you’ll have to add funds from other sources equal to the amount withheld, per the IRS. Most people don’t realize this 20% withholding means they’d need to make up that amount from other savings to complete the rollover in full. A failed indirect rollover – where the 60-day deadline is missed – is fully taxable, plus a potential 10% early withdrawal penalty for anyone under 59½. The simplest protection: always request a direct rollover. Ask your new plan administrator or IRA custodian to initiate the transfer directly, so the money never touches your personal account.
You can find more context about how these and other rule changes affect your retirement planning in our coverage of the SECURE 2.0 changes.
6. Missing Required Minimum Distributions – and the 25% Penalty
Required Minimum Distributions (RMDs) – the mandatory annual withdrawals the IRS requires once you reach a certain age – are one of the most penalized mistakes in retirement accounts. Under current IRS rules, you must generally begin taking withdrawals from your traditional 401(k) and IRA accounts starting at age 73, as confirmed by the IRS. Miss one, and the consequences are swift.
Missing an RMD triggers a 25% penalty on the amount you should have withdrawn – a figure reduced from 50% under the SECURE 2.0 Act, according to updated IRS guidance on RMD penalties. That’s 25 cents of every dollar you were supposed to take out, paid directly to the IRS as a penalty – on top of the income tax owed on the distribution when you do eventually take it. The IRS calculates your RMD amount each year based on your account balance and your age-based life expectancy factor. If your balance is $500,000 and your required distribution is $20,000, missing that deadline costs you $5,000 in penalties alone. Set a calendar reminder for your first RMD year, confirm the exact amount with your plan administrator, and consider setting up automatic annual distributions to avoid the oversight entirely.
7. Taking a 401(k) Loan Without Understanding the Repayment Rules
A 401(k) loan can be a reasonable short-term option when used carefully, but the fine print catches many borrowers off guard – especially when their employment situation changes. The borrowing cap is $50,000 or 50% of your vested balance, whichever is less, and most loans must be repaid within five years, according to the IRS. The repayment is made through payroll deductions, which feels manageable while you’re employed.
Leaving your job changes the math entirely. A 401(k) rollover or distribution move isn’t taxable as long as you follow IRS rules, but one wrong step can trigger income tax on the entire balance plus a 10% early withdrawal penalty if you’re under 59½ – the same logic applies to an unpaid loan balance after leaving employment. The unpaid balance becomes taxable income, subject to income tax and the 10% early withdrawal penalty for anyone under 59½. Under SECURE 2.0, departing employees now have until the tax filing deadline of the year they left (including extensions) to repay the outstanding loan or roll the balance into an IRA to avoid the tax hit – a modest improvement over the old 60-day rule, but still a deadline many miss. Before taking a 401(k) loan, calculate the full repayment cost, confirm what happens to the loan if you leave your employer, and consider whether a personal loan with a fixed rate might be less risky given your employment outlook.
8. Violating IRS Plan Document Rules – the Compliance Mistake Most Savers Don’t Know Exists
This final category of 401(k) mistakes to avoid is less visible to individual employees but critically important for business owners and HR administrators managing employer plans. Failure to follow plan terms is a very common mistake, according to the IRS – and the consequences extend to participants, not just plan sponsors. If a plan document says eligible employees must be enrolled within 30 days of hire and that process isn’t followed, those employees may have missed months of tax-advantaged contributions, and the employer may owe corrective contributions to make them whole. The IRS 401(k) Fix-It Guide explicitly identifies this as one of the most common operational failures.
Not properly implementing an employee’s deferral election is a relatively common error identified by the IRS, documented on the IRS corrections page. Equally problematic: excluding employees who should have been allowed to make elective deferrals is a recurring compliance issue that requires corrective contributions, according to the same IRS corrections guidance. Plan documents must also be updated regularly. The IRS recommends maintaining a calendar that notes when amendments must be completed and reviewing the plan document annually, as outlined in the IRS 401(k) Fix-It Guide. Beginning in 2026, the SECURE 2.0 Act requires high earners to make catch-up contributions on a Roth basis. A participant is considered a high earner for 2026 if they received more than $150,000 in FICA wages in 2025, according to Fidelity’s catch-up contribution guidance. If your payroll system hasn’t been updated to reflect this, catch-up contributions may be misclassified, creating a compliance issue that takes time and money to correct.
What to Do Now
None of these eight mistakes require sophisticated investing knowledge to avoid. They require knowing your plan’s specific rules, keeping up with annual limit changes, and understanding the penalties attached to missteps before those missteps happen. Confirming your contribution rate captures the full employer match, knowing whether you’re eligible for the standard or enhanced catch-up contribution, and requesting a direct rollover when changing jobs are decisions that take minutes to execute and can alter the trajectory of your retirement account by tens of thousands of dollars.
For business owners and HR teams managing 401(k) plans, the IRS’s Fix-It Guide covers the most common operational failures and the corrective steps required for each – it’s a practical document, not just a warning list. For individual employees, a 30-minute conversation with your plan administrator or a fee-only financial planner before year-end 2026 can confirm whether you’re on the right side of every rule covered here. The limits, deadlines, and penalties in this article reflect current IRS guidance – and given how many of these rules changed in the past two years, a quick check is worth making before the calendar turns.
Disclaimer: This information is not intended to be a substitute for professional financial advice, investment advice, tax advice, or legal advice, and is provided for informational purposes only. Always seek the guidance of a qualified financial advisor, accountant, or other licensed professional regarding your personal financial situation or investment decisions. Do not make financial, investment, or tax decisions based solely on information presented here. Past performance is not indicative of future results, and all investments carry risk, including the potential loss of principal.
AI Disclaimer: This article was created with the assistance of AI tools and reviewed by a human editor.