6 Costly Mistakes People Make When Taking Money Out of Their 401(k), and, a Better Way Forward.

Your 401(k) is one of the biggest financial assets you'll ever build. It represents years—sometimes decades—of hard work, disciplined saving, and planning for the future. But when it's time to access those funds, one decision can have a lasting impact on your retirement. Unfortunately, many people withdraw money without fully understanding the tax consequences, missed growth opportunities, or alternative strategies that may better support their long-term goals. Just one wrong decision (or a series of them) can cost you thousands in taxes, penalties, or missed growth.

Retirement planning isn't just about accumulating wealth—it's about preserving it, creating sustainable income, and making informed decisions that support the lifestyle you've worked so hard to build. For many individuals approaching retirement or changing careers, it may also be worth exploring whether a rollover into a Fixed Indexed Annuity (FIA) fits their overall strategy. I've met a lot of people who leave a job, retire, or simply need access to cash, and their first thought is, "I'll just take the money out." Before you do that, there are a few things worth thinking through.

Here are six of the most common mistakes I see.

1. Cashing Out Instead of Exploring a Rollover

This is probably the biggest mistake.

When people change jobs or retire, they often cash out their 401(k) without realizing they may owe taxes and, if they're under age 59½, potentially an early withdrawal penalty unless an exception applies.

More importantly, that money stops working for your future.

For many people, rolling those funds into another qualified retirement account can help preserve tax-deferred growth while giving them more flexibility and investment choices.

• Ask Yourself: Why pay penalties today when a direct rollover can preserve 100% of your capital tax-free?

2. Forgetting That Uncle Sam Gets a Cut

A lot of people look at their account balance and assume that's what they'll receive.

Unfortunately, that's not always the case.

Traditional 401(k) withdrawals are generally taxed as ordinary income. A large withdrawal could push you into a higher tax bracket or increase your tax bill for the year, increasing your overall tax burden and shrinking what actually hits your bank account.

Before taking money out, ask yourself:

How much will I actually keep after taxes?

And...

Do I need it that bad? Where could this money better serve me and my future?

3. Thinking Short-Term Instead of Long-Term

Using retirement money to solve today's problem can create a much bigger problem tomorrow.

Every dollar you withdraw is a dollar that no longer has the opportunity to grow for your retirement.

Sometimes taking money out is necessary, but it shouldn't be your first option without understanding what you're giving up.

4. Waiting Too Long to Think About Required Minimum Distributions (RMDs)

Many people don't think about Required Minimum Distributions (RMDs) until they're required to start taking them and therefore fail to plan for them.

Why It Hurts Your House: Once you hit your RMD age, the IRS forces you to take annual distributions whether you need the income or not. If you fail to take your exact RMD amount on time, the IRS imposes steep tax penalties on what should have been withdrawn.

• Ask Yourself: Do I have a distribution schedule that accounts for RMDs while preserving my nest egg?

5. Not Having an Income Strategy

Saving for retirement is only half the journey. The other half is figuring out how you'll create reliable income once you stop working. To withdraw this money throughout life, haphazardly without a structured retirement income floor is planning to outlive your money.

Without a plan, it's very easy to withdraw too much, too little, or at the wrong time.

Without a clear withdrawal well-timed sequence across taxable, tax-deferred, and tax-free buckets, you risk experiencing Sequence of Returns Risk (market drops early in retirement forcing you to sell at a loss).

A thoughtful, and guided withdrawal strategy can make a significant difference in how long your retirement savings last.

6. Trying to Figure It All Out Alone

This is the worst mistake. Quite often the gap between you and your next best decision is counsel & a little more knowledge. Retirement isn't just about investments. It's about taxes. Income. Healthcare. Inflation. Legacy planning. Social Security. Medicare. It's layered. Every decision affects another. You don't have to wing it or figure it out all alone. You can take a real, informed look at your situation if you invite someone skilled to come alongside you - review your buckets, your gaps, and create a well-timed plan to maximize your money's growth AND preservation.

An Alternative to Withdrawal: Is Fixed Indexed Annuity Worth Considering?

YES. One option that's often overlooked is a Fixed Indexed Annuity (FIA). For someone nearing retirement or looking for more stability, fixed indexed annuities can be a valuable part of an overall retirement strategy.

It's worth exploring if you're looking for features such as:

• Protection from market losses (subject to the insurer's claims-paying ability)

• Tax-deferred growth

• The potential to earn interest linked to a market index without directly investing in the market

• Optional guaranteed lifetime income riders.

• More predictable retirement income... which, is the point, right?

I've had conversations with many people who didn't realize an FIA was even an option. Every financial journey is different, and there is no one-size-fits-all solution. That's why it's important to understand your options before making irreversible decisions about your retirement savings.

I don't mind taking the time to determine whether it fits my clients' goals, timeline, and risk tolerance not assuming it's automatically the best choice.

Before You Touch Your 401(k)...

Don't make a permanent decision based on limited information.

A quick retirement review today could help you avoid unnecessary taxes, penalties, or missed opportunities—and help you better understand all of your options, including whether a rollover or a Fixed Indexed Annuity makes sense for your situation.

If you're thinking about changing jobs, retiring, or simply wondering what to do with your retirement savings, I'd be happy to walk through your options with you.

Send me "RETIRE" or schedule a complimentary retirement review. I'll help you make informed decisions with confidence... no pressure, just education and a strategy built around what matters to you.

Disclaimer: This article is for educational purposes only and is not individualized tax or investment advice. Tax rules and retirement strategies vary based on your circumstances. Consider consulting with a qualified tax professional before making decisions that could have tax consequences.