401(k) contribution strategy pitfalls

There’s a strange comfort in following rules—especially when it comes to money. In a landscape filled with financial uncertainty, the 401(k) “contribution hierarchy” seems like a simple, strategic framework to follow. But what happens when that framework doesn’t match your real life?

This is the story of how a mid-career professional, financially disciplined and following all the “right” advice, ended up strapped for cash at the worst possible time. Not because they overspent. Not because they didn’t save. But because they saved in the wrong order for their stage of life.

Most financial advisors suggest the following order for retirement saving:

1. Contribute enough to get your full 401(k) employer match – It’s free money.
2. Max out a Roth IRA – If you’re under the income threshold, it grows tax-free.
3. Then contribute more to your 401(k) – Up to the IRS annual limit ($23,000 in 2025).
4. Only after that, invest in a taxable brokerage account – For additional flexibility.

This hierarchy is built around maximizing tax advantages and long-term compound growth. It’s an efficient formula on paper. But it quietly assumes that:

• Your income is stable
• Your expenses are predictable
• You won’t need to access that money for decades

And that’s where things can start to break down.

Kathy (not her real name) was 38, single, and working in digital marketing at a major healthcare firm. She made good money—about $130,000 annually—and took pride in her financial discipline.

For five straight years, she:

• Maxed out her 401(k) contributions, even beyond the employer match
• Skipped opening a Roth IRA once she crossed the income eligibility threshold
• Deferred saving in a taxable brokerage account
• Maintained a modest emergency fund, equivalent to 2 months’ expenses

She did everything the hierarchy told her to do. Until a merger led to her role being eliminated.

The job loss came with only 4 weeks of severance. And her next role—though eventually landed—took six months to materialize. In the meantime:

• Her living expenses had to be covered by that small emergency fund
• She couldn’t easily access her 401(k) savings without incurring penalties
• Selling restricted stock from her former employer was complex and delayed
• Credit card debt began to pile up as she covered gaps

The irony? She had over $250,000 saved in her 401(k)—but couldn’t touch it without triggering early withdrawal penalties, taxes, and long-term consequences for her retirement plan.

Retirement accounts like a 401(k) are powerful tools—but they’re not all-purpose savings. Here’s what they don’t do well:

• Offer liquidity: Withdrawing before age 59½ typically incurs a 10% penalty, plus taxes
• Fund mid-term goals: Home down payment? Career break? Business pivot? You’ll need non-retirement savings
• Support cash-flow emergencies: Even 401(k) loans come with strings attached and repayment risks

In Kathy’s case, the rigid hierarchy didn’t account for the volatility of real life. She optimized for retirement—but at the cost of short-term financial flexibility.

Rather than treating it as a rulebook, treat the contribution strategy as a menu. The best plan is one that fits your cash flow, life phase, and risk tolerance.

Here’s a reframed order that works better for most professionals in their 30s and 40s:

1. Contribute enough to get your full 401(k) match – Still non-negotiable.
2. Build a 6-month emergency fund – In a high-yield savings account, not invested.
3. Save for mid-term goals – A home deposit, sabbatical, or caregiving fund.
4. Then invest more in 401(k) or brokerage based on liquidity needs

Why this works:

• It buffers you from income shocks
• It builds optionality into your life
• It helps you avoid debt traps that erase long-term gains

Before funneling another dollar into your retirement account, pause and ask:

• “Do I have at least 6 months of accessible, penalty-free cash?”
• “What are the odds I’ll need this money in the next 5 years?”
• “Am I using my tax-advantaged space to delay taxes—or to delay life?”

If the answer to the second question is yes, consider splitting contributions between your 401(k) and a brokerage account.

Yes, 401(k) contributions lower your taxable income today. But here’s what they don’t do:

• They don’t give you control over withdrawal timing
• They don’t exempt you from required minimum distributions at age 73
• They don’t help you with life costs before retirement

A taxable brokerage account, by contrast, gives you:

• Liquidity
• Long-term capital gains treatment
• Easier withdrawal anytime, for any reason

That flexibility can be worth more than the short-term tax break—especially in a volatile job market.

Looking back, Kathy doesn’t regret saving. But she regrets where she saved. Her new plan includes:

• Keeping 6 months of expenses in cash equivalents
• Capping 401(k) contributions at the match while rebuilding liquid reserves
• Funding a taxable investment account for medium-term goals
• Using backdoor Roth contributions once liquidity is sufficient

She still believes in retirement planning. But now she builds her savings to serve her, not just future tax scenarios.

The best personal finance plans are not the most aggressive—they’re the most aligned. If you’ve been treating the 401(k) hierarchy like gospel, it may be time to loosen your grip. Build liquidity before you build lock-in. Plan for real life, not just retirement. You don’t need to be aggressive. You need to be aligned.