Retirement Retirement Planning

8 Lies You’ve Been Told About 401(k)s (And Probably Believed)

Is this retirement account all that it is cracked up to be?

By Chris Lewis, CEPF , Edited by Laura Hohenstein

Updated July 6, 2026

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Millions of workers keep the majority of their nest egg in a 401(k) retirement account. Thanks to tax incentives, employer matches, and other perks, it's hard to ignore this popular investment vehicle as you prepare for retirement.

However, it's easy to become confused about the specifics and assume things about 401(k) plans that might not be true. Here are some lies you have been told about your 401(k).

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A 401(k) is always the best place for retirement savings

A 401(k) plan is often the best place for workers to start investing to save for retirement. But this isn't always the case.

Some 401(k) plans offer a limited number of investment choices. Other plans have high fees. In addition, you typically are unable to use a 401(k) to invest in individual stocks or bonds.

Also, some 401(k) plans don't offer a Roth option. This can be a deal-breaker for workers who would prefer to pay taxes today in exchange for never having to pay them again.

In short, your 401(k) may have limitations that prevent you from investing in line with your personal goals and desires. If this is true for you, you might want to put some of your retirement savings into another type of account.

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There's no downside to borrowing from a 401(k)

When you're looking to borrow money, 401(k) loans seem like a good option. You can borrow from the retirement account relatively easily. And instead of paying interest to a lender, you pay the interest to yourself.

However, there are some drawbacks to consider before taking a loan from your 401(k). If you leave your employer and still have an outstanding loan, you may be required to repay the balance promptly, with the exact time frame depending on the plan.

Failure to repay the money promptly may result in the amount being treated as an early distribution, subject to a 10% early withdrawal penalty and income taxes.

Taking a loan from your 401(k) also robs that money of the power of compounding until you pay back the cash.

Fees in a 401(k) plan don't matter

Many 401(k) plans include a range of fees, including investment, plan administration, and individual service fees.

These fees are usually small, but they can have a huge impact on the size of your nest egg. In fact, over the decades, you could lose tens of thousands, or even hundreds of thousands, of dollars to fees.

The U.S. Department of Labor says an employee with a 401(k) balance of $25,000 who earns a 7% return on investments over the following 35 years will have a nest egg of $227,000 at retirement if fees and expenses are 0.5%.

However, if fees and expenses are 1.5%, the balance dwindles to just $163,000.

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You can never withdraw funds before age 59 1/2

The IRS typically penalizes you heavily for taking funds from your 401(k) before you turn 59 1/2. There is a 10% early withdrawal penalty, plus you are required to pay income tax on the withdrawal.

However, there are some instances when you can take out the funds penalty-free. There are nearly two dozen exceptions that exclude you from the penalty, including:

Birth or adoption expenses
Medical expenses
Health insurance while unemployed
Natural disaster expenses
Higher education expenses
Personal emergencies

Everybody with a 401(k) has to start taking withdrawals at age 72

In the past, the IRS required folks who turned 72 to begin taking required minimum distributions (RMDs). However, the rule has recently changed.

Now, you must take the first RMD after you turn 73. For example, if you turn 73 in 202, you must take your first RMD no later than April 1, 202.

The age at which you must begin taking RMDs is scheduled to jump to 75 in 2033.

Getting access to your money is always easy

The majority of 401(k) accounts are tied to employers. If the company shuts down, goes into bankruptcy, or is acquired, the cash in your 401(k) could be tied up for months or even a year or more while the legal side is sorted out.

Given that there is a chance that your money could be frozen during such a period, it often makes sense to keep at least some savings outside a 401(k) plan.

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You can't contribute to a 401(k) if you make too much money

Unlike with IRAs, there is no income limit on high earners contributing to a 401(k) plan.

However, there are situations in which high earners and others may run into caps on how much they can contribute. So, always check with your plan administrator to see if such limits apply to you.

You always have to roll over your 401(k) when leaving a company

When you change employers, you don't always have to move the money into your 401(k) account.

For example, as of 202, you can typically leave your account with your old employer if you have more than $7,000 in it. That means you can keep the money invested where it is, hoping it will continue to grow and let you build wealth while you sleep.

Bottom line

A 401(k) plan can be a great place to grow your wealth and boost your odds of a secure retirement. But you shouldn't necessarily believe everything you hear about these accounts.

If you have questions about 401(k) plans, consider asking your human resources department at work for clarification. You can also consult a financial advisor for guidance.

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