401(k): Fact or Fiction

Separating myth from reality when it comes to your retirement savings.

Key takeaways:

• Start early to maximize growth. Even small contributions to your 401(k) at the start of your career can compound significantly over time.
• Understand the rules around withdrawals. You generally can’t withdraw from your 401(k) without penalty until age 59 ½, but exceptions like the “Rule of 55” may apply if you leave your job between ages 55 and 59 ½.
• Your 401(k) isn’t risk-free, but it is tax-advantaged. 401(k) investments are subject to market fluctuations and aren’t guaranteed, but they offer tax benefits and long-term growth potential, especially when paired with employer contributions.

When it comes to saving for retirement, the 401(k) is an essential tool for many Americans. But if you find yourself getting lost in the fine print, you’re not alone. The ins and outs of contributing, withdrawing and investing in a 401(k) can be difficult to navigate — and misinformation is rampant online. Understanding where your money is going and how to maximize your savings is essential for your financial future. No matter where you are in your career, now is a good time to cut through the noise and get the facts straight. 

Belief #1: I can withdraw from my 401(k) as soon as I retire without penalty.

Fiction. This is a common assumption, but it’s not always true. The IRS penalizes withdrawals for those younger than 59 ½ years old. If you take money out before reaching this age, you’ll likely face a 10% early withdrawal penalty on top of regular income taxes. 

However, there are exceptions. If you retire, quit or are laid off from your job between the ages of 55 and 59 ½, the “Rule of 55” allows penalty-free withdrawals from your last employer’s 401(k). This applies only to that specific employer’s plan, not to any old 401(k) accounts you may have rolled over.

IRAs (Individual Retirement Accounts) do not qualify for the Rule of 55, so if you’re considering retirement between 55 and 59 ½, it’s a good idea to keep your 401(k) with your employer rather than roll it into an IRA. If you are considering taking advantage of the Rule of 55, it is best to reach out to a Financial Professional to understand the provisions.

Belief #2: I don’t need to contribute to my 401(k) because I’m just entering the workforce.

Fiction. It may be tempting to put off retirement savings when your career is just getting started, as you may be focused on paying off student loans, building an emergency fund or simply managing day-to-day expenses. But delaying contributions (even by just a few years) can have a significant impact on your long-term savings.

Due to compound interest, early contributions grow exponentially over time. Even small, consistent deposits made in your 20s can snowball into a much larger nest egg than larger contributions made later in life. Another reason to start early: employer matching. If your company offers a 401(k) match, that’s essentially free money. Not contributing means leaving that benefit on the table.

Even if your budget is tight, consider starting with a small percentage and increasing it gradually as your earnings grow. Getting into the habit of saving now can set you up for far greater financial security in the future.

Belief #3: If I switch jobs, I can take my 401(k) balance with me.

Fact. When you leave a job, you typically have three options for the money in your 401(k):

• Roll the balance into your new employer's 401(k)
• Transfer it to an IRA
• Cash it out

Rolling over your 401(k) to a new employer’s plan or an IRA allows your money to continue growing tax-deferred and keeps things consolidated. Cashing out, on the other hand, is rarely a good idea. Not only will you owe income tax on the full amount, if you’re under 59 ½ years old, you’ll also face the 10% early withdrawal penalty. That can be a major setback for your long-term savings.

Tip: Need help navigating your next move? Whether you're changing jobs, contemplating a rollover, or just want clarity on your plan’s options, Northwest Bank’s financial professionals are ready to help. Find a Northwest Bank location near you to explore what's best for your retirement savings.

Belief #4: The money in my 401(k) is guaranteed.

Fiction. While a 401(k) is a powerful retirement savings tool, the money in your account is not guaranteed to grow or even maintain its value. That’s because 401(k) funds are typically invested in the market through mutual funds, stocks, bonds or target-date funds, meaning your balance can rise and fall depending on how your investments perform.

That said, you do have control over your investment choices. Most plans offer a range of options based on your age, risk tolerance and retirement timeline. Conservative investors may choose lower-risk bond funds, while younger investors might opt for higher-growth stock funds. The key is to understand your options and diversify your portfolio to balance risk and reward.

While market risk exists, a 401(k) remains one of the most effective ways to build long-term wealth, especially when paired with employer contributions and smart investment strategies.

Belief #5: Contributing to my 401(k) can reduce my taxable income.

Fact. One of the key advantages of a traditional 401(k) is that your contributions are made with pre-tax dollars. That means the money you put into your 401(k) is deducted from your taxable income for the year, which can lower your overall tax bill. For example, if you earn $60,000 and contribute $6,000 to your 401(k), you’ll only be taxed on $54,000 in income.

This tax deferral not only reduces what you owe today, as it also allows your investments to grow tax-deferred over time. You won’t pay taxes on your contributions or earnings until you begin withdrawing funds in retirement, when you may be in a lower tax bracket.

Conclusion

Your 401(k) is more than just a line on your paycheck. It’s a powerful tool for building a stable, confident retirement fund. By separating fact from fiction, you can make more informed decisions about your contributions, withdrawals and long-term strategy.

Looking to learn more? Find a Northwest Bank location near you for more information on different retirement plans, strategies and benefits.