The 3 biggest 401(k) mistakes costing Americans millions in retirement (and which ones may be crushing you)

Unfortunately, workers are more likely to do the opposite. A survey by Morgan Stanley (3) found that 39% of employees across the country had reduced their 401(k) contribution because of economic concerns about inflation and recession. Gen Z employees were much more likely to do so, with 48% of them saying they cut contributions recently.

Reducing contributions, particularly when you’re young, could have a significant impact on the size of your retirement nest egg over the long term.

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2. Not maximizing employer-match

Employer-match features are relatively common and surprisingly attractive. Roughly 98% of companies with a 401(k) plan offer some form of matching, according to the Plan Sponsor Council of America (4), and the average rate ranges between 4% and 6% of pay, according to Carry (5), an online investment platform.

However, only 54% of employees were contributing at or above their employer’s matching rate, according to a 2024 study by Vanguard (6). That means nearly half of all employees are leaving “free money” on the table by neglecting their employer match.

Don’t make the same mistake. These features are designed to be an added incentive for saving and building your nest egg, so take the time to learn how your employer calculates matching benefits and try to maximize your match.

3. Misunderstanding tax implications

Contributions to a traditional 401(k) lower your taxable income, so not contributing or lowering your contributions could push you into a higher, less favorable tax bracket. Even a modest income shift can trigger a higher marginal rate, raising your overall tax bill.

For high earners, the difference between staying just below a threshold and crossing it can run into hundreds or even thousands of dollars once federal, state and payroll taxes are factored in.

Many workers overlook this. They make contribution decisions based on current circumstances, and the tax implications don’t become clear until the next tax season. By then, it’s too late.

Avoid these subtle tax errors by taking a long-term view of your finances and planning your contributions well in advance. A single dollar saved in taxes today and deposited into your 401(k) has the opportunity to compound into several dollars in the future.

While there are many ways to boost your retirement savings, from contributing more to investing smarter, reducing taxes is probably the easiest lever to pull. Reach out to an expert who can help you navigate all the complex tax rules to optimize your long-term strategy.