AARP breaks down 401(k), IRA costly mistakes

AARP, the nonprofit organization that advocates for older Americans, says there are several smart steps people can take later in their careers to avoid retirement savings mistakes that could complicate their financial lives.For example, saving through a traditional IRA or 401(k) rewards you twice — you get an immediate tax break on the money you contribute today, plus your investment earnings grow shielded from taxes over time, AARP notes."However, relying solely on such accounts can lead to big tax bills when you begin making withdrawals in retirement," wrote AARP.Referring to IRS rules for required minimum distributions (RMDs), Keener Financial Planning's Jean Keener explains how.“People will max out these plans — and it does save a lot of money in your working years — but if you do that exclusively, sometimes that ends up being a mistake,” Keener said.Required minimum distributions force retirees to withdraw specific annual amounts from tax-deferred accounts, converting that money into taxable income whether needed or not.401(k) diversification helps reduce tax painAn optimal way to avoid this mistake is to diversify your retirement savings with Roth options.The Plan Sponsor Council of America’s (PSCA) 68th Annual Survey reveals that the SECURE 2.0 Act has triggered a dramatic increase in the number of employers to now offer Roth 401(k) options."At the end of 2024, 95.6% of plans offer a Roth option for their participants’ contributions," PSCA reported. "This is an increase from 92.5% in 2023, and 59.9% in 2015."AARP explains the tax advantage."Since taxes have already been paid on Roth 401(k) contributions, you can make tax-free withdrawals in retirement," AARP wrote. "You can reap the same tax gains by opening a personal Roth IRA and making regular after-tax contributions."But one difficult feature of SECURE 2.0 for employers to implement is its requirement that higher-paid workers make their catch-up contributions on a Roth basis.Retirement plan catch-up contributionsNearly two-thirds (64%) of retirees report wishing they had done more planning before retirement, according to a 2026 Schroders study.401(k) and IRA catch-up contributions are a critical tool to bridge the gap. For 2026, workers aged 50 and up can save an additional $8,000 in their 401(k) beyond the standard $24,500 limit — though high earners making over $150,000 in 2025 must direct those catch-up dollars into a Roth, according to the IRS.More on personal finance:Charles Schwab, Fidelity alert workers to forced 401(k) ruleDave Ramsey warns Americans on 401(k)s, IRAs (he’s not wrong)Congress research arm warns Americans on 401(k), IRA penaltyMeanwhile, IRA catch-up contributions for the 50-plus group add $1,100 on top of the base $7,500 cap across traditional and Roth accounts.When they reach retirement age, many people regret having invested too conservatively."In the years before you retire, putting too much of your money into low-risk investments such as certificates of deposit (CDs) or money-market accounts could hurt your ability to build a long-lasting nest egg," AARP wrote. AARP warns Americans about retirement savings mistakes to avoid.Shutterstock The pitfalls of borrowing from 401(k)sSchroders survey data shows that nearly 25% of Gen X retirement plan participants have taken a loan against their 401(k), frequently to cover unexpected emergencies or offset inflation. While IRS regulations allow borrowing up to $50,000 or half of your vested account value (whichever is lower), these loans require repayment with interest. Raiding your retirement plan is an enormous setback that is very difficult to get over."Failing to pay back the balance converts the loan into a taxable distribution, which triggers income tax plus a 10% penalty for those under age 59½.Even though the loan interest is paid back into your own account, the borrowed cash misses out on potential market growth while it's withdrawn."Raiding your retirement plan is an enormous setback that is very difficult to get over," said John Cooper, a certified financial planner and senior private client adviser with Greenwood Capital.Related: Dave Ramsey sends major 401(k), IRA message