401(k) Mistakes That Could Cost You More in Retirement

For years, I did exactly what many Americans do with their retirement savings. I put money into a Traditional 401(k), took the tax deduction, and assumed I would pay a lower tax rate once I retired.

The strategy sounded smart. In fact, it represented standard retirement advice for decades.

Then I started looking at the entire picture.

Instead of focusing only on the tax deduction today, I ran the numbers from the beginning of a career through retirement withdrawals and required minimum distributions. That exercise changed how I think about one of the most common 401(k) decisions.

The potential mistake isn’t saving in a 401(k). Saving consistently can create substantial wealth over time.

The question is when you want to pay the tax.

Traditional 401(k) vs. Roth 401(k): What’s the Difference?

A Traditional 401(k) gives you a tax benefit today.

You contribute money before federal income tax, which can reduce your taxable income for the year. The money then grows tax-deferred until you withdraw it in retirement.

At that point, the IRS taxes your withdrawals as ordinary income.

A Roth 401(k) flips that arrangement.

You pay taxes on your income before contributing to the account. Once the money enters the Roth 401(k), qualified withdrawals can come out tax-free later.

Both accounts can hold the same investments. Both can experience the same investment growth. The major difference comes down to when you pay the tax.

That distinction may look small when you’re filling out a benefits enrollment form. Over several decades, it can become much more significant.

The 401(k) Tax Break Feels Pretty Good Today

Consider someone earning $200,000 a year and contributing $24,500 annually to a 401(k).

Using the assumptions from our example, choosing the Traditional 401(k) instead of the Roth reduces the person’s federal tax bill by about $5,880 for the year.

That’s roughly $490 every month.

Most people can find plenty of ways to use an extra $490.

Mortgage payments, vacations, groceries, braces, cars, kids, and everyday life can absorb that money quickly. Over a 35-year career, those annual tax savings total about $205,800 in additional take-home pay in our hypothetical example.

That benefit matters,  but it represents only one side of the equation.

The Bigger Question Comes When You Start Taking 401(k) Withdrawals

Here’s where one of the most overlooked 401(k) mistakes can occur.

People often focus heavily on the tax deduction they receive while working without thinking as carefully about how taxes may affect their withdrawals later.

Imagine contributing $24,500 every year from age 30 through age 65 while earning an average hypothetical return of 7%. Under those assumptions, you contribute $857,500 and reach retirement with approximately $3.39 million.

The Traditional and Roth accounts can reach the exact same balance if you contribute the same amount and invest the money identically.

However, those account balances don’t necessarily represent the same amount of spendable money.

• The Roth saver has already paid income taxes on the money contributed.
• The Traditional 401(k) owner still owes taxes when the money comes out.

A $3 Million 401(k) Isn’t Necessarily $3 Million You Can Spend

Suppose you retire and want to withdraw $10,000 per month.

With qualified Roth withdrawals, you can generally take out $10,000 and have $10,000 available to spend.

A Traditional 401(k) works differently.

Every taxable withdrawal adds to your ordinary income. In the hypothetical example from our analysis, withdrawing $120,000 per year produced roughly $16,400 in federal income taxes under the assumptions used.

That leaves approximately $8,600 per month after federal taxes.

Want the same $10,000 of monthly spending power as the Roth retiree?

You would need to withdraw closer to $11,800 per month in the example.

As a result, you may need to pull more money from the account to support the same lifestyle.

But Aren’t You Supposed to Be in a Lower Tax Bracket in Retirement?

Maybe. In fact, our hypothetical example assumes exactly that.

The person receives a deduction at a 24% marginal federal tax rate while working, then experiences an effective federal tax rate of roughly 14% on the modeled retirement withdrawal.

So the old advice wasn’t necessarily wrong.

It simply didn’t tell the entire story.

You receive the original tax deduction on the money you contribute.

Later, you pay taxes on the contributions plus decades of investment growth when you withdraw the money.

Think of it this way.

You avoided paying tax on the seed. Eventually, the IRS can tax the harvest.

That difference becomes increasingly important as the account grows.

Required Minimum Distributions Can Change the Equation Again

Traditional retirement accounts come with another consideration: required minimum distributions, commonly called RMDs.

Under current rules reflected in our example, someone born in 1960 or later generally starts RMDs at age 75. Those born from 1951 through 1959 generally begin at 73.

At that point, you don’t get to decide whether you want to withdraw money from the Traditional account.

The IRS requires a minimum amount each year.

Imagine someone reaching age 75 with an untouched Traditional 401(k) worth approximately $6.66 million.

In our hypothetical scenario, the first required distribution comes to roughly $270,800.

That creates approximately $57,300 in federal income tax under the assumptions we modeled.

A Roth 401(k), by contrast, does not require lifetime RMDs for the original owner under current rules.

That difference can create considerably more flexibility when you’re managing taxable income in retirement.

What If You’re Already in Your 50s?

This conversation becomes especially relevant for people who already have significant retirement savings.

You can’t go back and change how you contributed twenty years ago.

You can decide what you do with your next contribution.

Our second example looked at someone who reaches age 55 earning $200,000 with $1 million already accumulated inside a Traditional 401(k).

Instead of continuing to make Traditional contributions, that person directs the next ten years of contributions into the Roth side of the plan.

The additional taxes total about $58,800 over those ten working years in the example.

By age 65, the Roth portion grows to roughly $338,500.

At age 75, it reaches approximately $666,000.

Because less money remains subject to required distributions, the person’s first modeled RMD drops from roughly $184,000 to $157,000.

The first-year tax difference equals about $6,750 under the model. Over time, the gap continues to grow.

The bigger benefit may come from flexibility.

That retiree now controls a pool of Roth money that can potentially fund large expenses without increasing taxable income.

• Maybe you want to buy a car.
• Perhaps you’re helping a child purchase a home.
• You could need money for travel, healthcare, home renovations, or another major expense.

Having both taxable and tax-free retirement accounts can give you more choices when deciding where that money comes from.

Why Do So Many People Ignore the Roth 401(k)?

Inertia plays a big role.

Vanguard’s How America Saves 2026 report found that 98% of the plans in its dataset offered a Roth feature at the end of 2025.

Only 18% of participants who had access to Roth directed any contributions toward it.

Other research cited in our analysis found a similar pattern.

Many employees simply continue using whatever retirement election they made when they first enrolled.

People change jobs, raise families, buy homes, and manage careers. Most don’t spend their free time rereading their employee benefits paperwork.

Unfortunately, a decision someone makes in their 20s or 30s can quietly continue for decades.

Is a Traditional 401(k) a Mistake?

Not necessarily.

A Traditional 401(k) can make sense in certain situations, particularly when someone’s current tax rate substantially exceeds the rate they expect to pay later.

Employer matching also matters.

If your employer offers a 401(k) match, taking advantage of that benefit often deserves priority regardless of whether the employer contribution lands in a Traditional or Roth account.

Your income, current tax bracket, future income needs, retirement date, Social Security strategy, investment assets, estate plan, and state taxes can all influence the decision.

That’s why framing this as simply “Roth good, Traditional bad” misses the point.

The bigger 401(k) mistake may come from making the choice once and never looking at it again.

One Question to Ask Before Your Next 401(k) Contribution

Instead of asking only:

How much can I save on taxes this year?

Consider another question:

How much control do I want over my taxes in retirement?

Retirement planning doesn’t stop with accumulating the biggest account balance possible. You also need to think about how you’ll eventually turn that balance into spendable income.

For years, I looked at my Traditional 401(k) and saw retirement savings. Now I see something slightly different.

Part of that balance belongs to me. Another portion represents a future tax obligation whose exact size I don’t yet know.

That’s why I approach my own contributions differently today.

The goal isn’t simply to build the biggest number on a statement. It’s to understand how much of that number you’ll actually get to use.

Your 401(k) Is Only One Piece of the Retirement Puzzle

Choosing between a Traditional and Roth 401(k) matters, but that decision shouldn’t happen in isolation.

Your retirement income, taxes, investments, Social Security, insurance, and estate plan all affect one another. A strategy that looks smart in one area can create unintended consequences somewhere else.

That’s why the goal isn’t simply to accumulate more money. It’s to build a retirement strategy that helps you understand what you have, what you’ll need, and how each piece works together.

The Bonfire Method brings those pieces into one coordinated plan. Over four meetings and 30 days, we look at your investments, taxes, retirement income, insurance, and estate planning to help you see the full picture before making major retirement decisions.

If you’re approaching retirement and wondering whether your current strategy is really working together, learn more about the Bonfire Method and see what your retirement plan may be missing.