A comfortable retirement is the brass ring for many Americans. And one of the best ways to plan for retirement is to stash cash in a 401(k).
With a 401(k), you can designate a percentage of your income to be automatically deducted from your paycheck and earmarked for retirement.
It might seem straightforward, but 401(k) plans come with specific rules that impact how they are used and taxed. Over time, some misconceptions about 401(k)s have flourished. Here are eight myths that can trip you up.
A 401(k) plan is always the best place for retirement savings
A 401(k) can be a great place to save for retirement. But that doesn’t mean it’s always the best choice in every situation.
For example, some people might prefer to split their retirement savings between an IRA (traditional or Roth) and a 401(k), since IRAs often offer a wider range of investments and greater control over fees.
Others might find that their workplace 401(k) does not offer a Roth option and thus might prefer to contribute to a Roth IRA over a 401(k).
You can never take early withdrawals from a 401(k) plan
If you withdraw money from a 401(k) before you hit the age of 59 ½, it is usually classified as an early withdrawal. That can subject the withdrawal to both taxes and a 10% penalty.
However, there are exceptions where the 10% penalty does not apply. And even if the penalty does apply, you can still access your cash if you are willing to pay the fee, and the taxes.
You can also loan yourself money from your 401(k) without fear of penalties as long as you repay within the appropriate time frame, usually five years.
The bottom line is that you can make withdrawals if you must.
You will be in a lower tax bracket when you retire
Many people contribute to a 401(k) today in hopes of delaying taxes until they are in a lower tax bracket during retirement. But it doesn’t always work out that way.
Tax rates are low today by historical standards, but they might rise in the future.
Also, it’s possible that you will do so well as an investor that your tax rates will actually be higher in retirement, especially once you have to take the required minimum distributions beginning at age 73.
It’s possible your tax rate will be lower in retirement, but you shouldn’t simply assume that will be the case.
Earn $200 cash rewards bonus with this incredible card
There's a credit card that's making waves with its amazing bonus and benefits. The Wells Fargo Active Cash® Card(Rates and fees) has no annual fee and you can earn $200 after spending $500 in purchases in the first 3 months.
The Active Cash Card puts cash back into your wallet. Cardholders can earn unlimited 2% cash rewards on purchases — easy! That's one of the best cash rewards options available.
This card also offers an intro APR of 0% for 12 months from account opening on purchases and qualifying balance transfers (then 19.74%, 24.74%, or 29.74% Variable). Which is great for someone who wants a break from high interest rates, while still earning rewards.
The best part? There's no annual fee.
401(k) plans have almost no fees
Contributions you make to a traditional 401(k) can reduce the amount of federal income tax you owe, but that doesn’t mean your contributions are free from fees.
Many 401(k) plans are notorious for the fees they charge. The U.S. Department of Labor advises considering these fees before investing in your employer's plan.
You can't leave a 401(k) with a former employer
If you leave a company, you typically have the option to take your 401(k) with you and roll it over into an IRA. But in many cases, you are not required to do so.
When a plan sponsor allows it, you can leave the money in your old company's plan even if you no longer work there.
Trending Stories
You can't contribute to both a 401(k) and an IRA
With this one, the devil is in the details.
The IRS is OK with a combination of savings strategies, allowing contributions to both a 401(k) and an IRA during the same year. However, you must adhere to contribution and deduction limits and follow the rules closely.
Some people might be more comfortable working with a financial advisor before trying this strategy.
401(k) loans beat traditional loans
Giving yourself a loan from your 401(k) may not be the worst idea in the world, but it often is far from the best.
One downside of borrowing from a workplace retirement plan is that you lose the opportunity for investment growth.
Also, if you separate from service with your company, you might be required to pay back the entire loan in a relatively short period of time.
Bottom line
Contributing to a 401(k) plan can be a great way to set yourself up for retirement. Saving for retirement in this way is convenient, offers tax incentives, and often comes with employer matches.
However, not all the advice about 401(k) plans is accurate. If you are unsure of what is true and what is not, consider meeting with a financial advisor before making big money decisions.
Lucrative, Flat-Rate Cash Rewards
FinanceBuzz writers and editors score cards based on a number of objective features as well as our expert editorial assessment. Our partners do not influence how we rate products.
Wells Fargo Active Cash® Card
Current Offer
$200 cash rewards bonus after spending $500 in purchases in the first 3 months
Annual Fee
$0
Rewards Rate
Earn unlimited 2% cash rewards on purchases
Benefits
- Low spend threshold for its welcome offer — $200 cash rewards bonus after spending $500 in purchases in the first 3 months
- Cell phone protection benefit (subject to a $25 deductible)
- Can redeem rewards at an ATM for literal cash
Drawbacks
- Foreign transaction fee of 3%
- No bonus categories
- Select “Apply Now” to take advantage of this specific offer and learn more about product features, terms and conditions.
- Earn a $200 cash rewards bonus after spending $500 in purchases in the first 3 months.
- Earn unlimited 2% cash rewards on purchases.
- 0% intro APR for 12 months from account opening on purchases and qualifying balance transfers. 19.74%, 24.74%, or 29.74% Variable APR thereafter; balance transfers made within 120 days qualify for the intro rate and fee of 3% then a BT fee of up to 5%, min: $5.
- $0 annual fee.
- No categories to track or remember and cash rewards don’t expire as long as your account remains open.
- Find tickets to top sports and entertainment events, book travel, make dinner reservations and more with your complimentary 24/7 Visa Signature® Concierge.
- Up to $600 of cell phone protection against damage or theft. Subject to a $25 deductible.
Subscribe Today
Want extra-cash moves to come right to you?
Stop browsing endlessly. Get proven ways to earn pocket money, help cover rent, and crush your debt — sent to your inbox daily.