Four 401(K) Myths That Could Leave You Broke

employee benefits originals Nov 21, 2023
Retirement planning 401(K) Social media Financial path Common myths Pre-tax contributions Rising tax environment Tax deduction Retirement income Progressive tax system After-tax Roth 401(K) contribution Long-term savings plan Inheritance Fees Institutions Online brokerage Employer match Risk-free ROI Ultra-low-cost index funds Active investment management S&P 500 index fund Schwab® S&P 500 Index Fund (SWPPX) Real estate Cryptocurrencies Investment options Accessible before retirement Hardships Penalty-free Loans Roth 401(k) contributions Tax-free Insights Maximizing benefits Strategic tax planning Cost-efficiency Institutional share classes Long-term investment strategy Early access strategies Conclusion

In the world of retirement planning, generalization and gaslighting on social media about 401(K)'s often lead employees down the wrong financial path.

In this article, we'll debunk four common myths that may be holding you back from maximizing the potential benefits of your 401(K) account.

Myth 1: Pre-Tax Contributions Don't Make Sense in a Rising Tax Environment—In other words, It doesn’t make sense to take a lower tax deduction now when distributions at retirement would be projected at a higher tax rate.

Reality Check: While withdrawals are taxable, the progressive tax system means retirees often fall into lower tax brackets because they typically earn less during their retirement years. If this is you, contribute pre-tax now and potentially pay less in taxes during retirement. If you are ahead in your long-term savings plan or are expecting an inheritance that will kick off more income after your working years, consider an after-tax Roth 401(K) contribution since you see taxes increasing in the future.

Myth 2: 401(K)s Are Loaded with Expensive Fees

Reality Check: They definitely can be! That's why it's important to know that 401(K)’s are categorized as institutions, which means they have the potential to be cheaper than e-trade (or any other online brokerage). They simply need to be setup properly, and it’s easier to find out if your 401(K) is overcharging than most employees realize. (Selfish Plug) is our free-to-use resource.

401(K)’s actually have the potential to offer investments cheaper than any online retail brokerage. Joe Mechanic would only be able to buy retail-priced shares through his online brokerage account, but since Joe is investing with a group of employees, Joe is able to pay the same ongoing fees that Wells Fargo or Bank of America pays prior to marking up their mutual funds and earning recurring revenues from ongoing fees, which lowers the return on investment.

If your employer offers a match, your risk-free ROI jumps drastically, and you will always negate fees. A 401(K) with an employer match should be considered first for your recurring retirement savings dollars. Ultra-low-cost index funds have historically outperformed over the long term, displacing the need for active investment management and the layers of fees that were once the standard.

Myth 3: Limited Investment Options in 401(K)s

Reality Check: Actually, investing in a low-cost S&P 500 index fund, like the Schwab® S&P 500 Index Fund (SWPPX), can be one of the most profitable options over time. It's easier than dealing with real estate or cryptocurrencies. So, instead of thinking your choices are limited, consider them as top-performing investments that don't need extra effort.

Myth 4: 401(k) Contributions Aren't Accessible Before Retirement

Reality Check: Certain hardships are penalty-free, and many Plans offer loans in which you can pay yourself the interest. Roth 401(k) contributions can also be accessed penalty-free and tax-free before age 59.5.

Insights for Maximizing Your 401(K) Benefits:

  • Strategic Tax Planning: Leverage the progressive tax system to optimize pre-tax contributions for a potentially lower tax burden in retirement.
  • Cost-Efficiency: Research institutional share classes and consider employer matches when evaluating the overall cost-effectiveness of your 401(k).
  • Long-Term Investment Strategy: Embrace the power of low-cost index funds for consistent, reliable returns over the long term, avoiding the pitfalls of actively managed options.
  • Early Access Strategies: Familiarize yourself with penalty-free options like hardship withdrawals, loans (if available), and tapping into Roth 401(k) contributions when needed before age 59.5.


Don't let these common myths sabotage your retirement savings. Understanding the nuances of 401(K) accounts can empower you to make informed decisions, ensuring your financial well-being in retirement. By debunking these myths, you can take charge of your 401(K) strategy and pave the way for a more secure and prosperous future.

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