Think your retirement plan is solid? Most Americans believe dangerous myths about their retirement accounts that silently drain thousands from their future security.
Your 401(k) might be leaking money right now due to misunderstandings about RMDs, state taxes, or account protections. The worst part? Financial advisors rarely correct these misconceptions because they’re so widespread.
But here’s good news: once you know these 10 retirement account myths, you can immediately plug the leaks and potentially save tens of thousands in unnecessary taxes and fees.
1. Roth IRA Conversions Can Be Reversed If Your Tax Situation Changes
Prior to the Tax Cuts and Jobs Act of 2018, many retirees utilized a strategy known as recharacterization to reverse Roth IRA conversions if market conditions changed or their tax situation shifted unexpectedly.
This flexibility allowed investors to optimize their tax strategy by undoing conversions that no longer made financial sense. However, this option was eliminated by the 2018 tax legislation, making all Roth conversions permanent and irreversible once executed.
This significant change means that pre-conversion planning is now critically important, as taxpayers must carefully consider their current and projected tax situation before initiating any Roth conversion strategy, since they’ll be unable to reverse course if circumstances change.
Tips:
- Work with a tax professional to model different tax scenarios before converting
- Consider converting smaller amounts over multiple years to spread out the tax impact
- Time conversions during years when your income might be lower than usual
- Factor in potential changes to your tax bracket when planning conversions
- Document market values at the time of conversion for accurate tax reporting
2. Roth 401(k)s Are Exempt From Required Minimum Distributions (RMDs)
Many retirement savers incorrectly assume that Roth 401(k) accounts follow the same RMD rules as Roth IRAs, but this is a costly misconception. Unlike Roth IRAs, which never require minimum withdrawals during the owner’s lifetime, Roth 401(k) accounts are subject to Required Minimum Distributions beginning at age 73.
This requirement forces withdrawals even when money could otherwise continue growing tax-free indefinitely.
The good news is that a straightforward solution exists: rolling your Roth 401(k) funds into a Roth IRA allows you to avoid RMDs entirely, preserving the tax-free growth potential and providing greater flexibility for estate planning purposes and lifetime tax management strategies.
Tips:
- Consider rolling your Roth 401(k) into a Roth IRA before reaching age 73
- Compare investment options and fees between your 401(k) and potential IRA providers before rolling over
- Maintain documentation of the rollover for your tax records
- Remember that the five-year holding period for Roth accounts may restart with a rollover
- Plan the timing of your rollover to avoid interfering with other financial transactions
3. HSAs Can’t Double as Retirement Accounts
Health Savings Accounts (HSAs) represent one of the most tax-advantaged vehicles available, offering a powerful triple tax benefit that outperforms even traditional retirement accounts. Contributions are tax-deductible, growth accumulates tax-free, and withdrawals for qualified medical expenses remain entirely tax-exempt at any age.
What many don’t realize is that HSAs transform into flexible retirement accounts after age 65, when the 20% penalty for non-medical withdrawals disappears.
At this point, non-medical withdrawals are simply taxed as ordinary income—identical to traditional IRA withdrawals—while medical withdrawals remain completely tax-free, making HSAs an exceptional and often overlooked component of comprehensive retirement planning.
Tips:
- Maximize HSA contributions annually if you’re eligible ($4,150 individual/$8,300 family for 2025)
- Consider investing HSA funds rather than keeping them in cash for long-term growth
- Save medical receipts indefinitely for tax-free withdrawals at any future date
- Delay using HSA funds for current medical expenses if you can pay out-of-pocket
- After 65, use your HSA strategically alongside other retirement accounts to minimize taxes
4. All Retirement Accounts Have Equal Creditor Protection
The level of protection your retirement assets receive from creditors varies significantly depending on the type of account you hold and your state of residence. ERISA-governed employer plans like 401(k)s benefit from robust federal protection against virtually all creditors, including bankruptcy proceedings.
However, IRA and Roth IRA protection is determined by state law, with substantial variation in the amount and circumstances of protection offered.
Some states provide unlimited protection similar to 401(k)s, while others cap protected amounts or exclude certain types of creditors. This disparity becomes particularly important when considering rollovers from employer plans to IRAs, as the transfer could potentially reduce your asset protection depending on your state’s specific regulations.
Tips:
- Research your state’s specific creditor protection laws for different retirement accounts
- Consider keeping funds in an employer plan if your state offers limited IRA protection
- Consult with an attorney specializing in asset protection before large rollovers
- Be aware that protection may differ between traditional IRAs and Roth IRAs in some states
- Understand that protection from bankruptcy may differ from protection against other creditors
5. You Can’t Contribute to Retirement Accounts After Age 72
The passage of the SECURE Act in 2019 eliminated the age cap for traditional IRA contributions, reversing a long-standing restriction that prevented contributions after age 70½. Today, individuals of any age can contribute to traditional IRAs as long as they have earned income, aligning these accounts with Roth IRAs which never had an age restriction.
Similarly, employer-sponsored retirement plans like 401(k)s allow contributions regardless of age as long as you remain employed.
This change provides significant planning opportunities for those working later in life, allowing continued tax-advantaged savings even after Required Minimum Distributions have begun, though coordination between contributions and distributions requires careful planning to maximize tax efficiency.
Tips:
- Continue making catch-up contributions ($1,000 for IRAs and $7,500 for 401(k)s in 2025) if eligible
- Coordinate IRA contributions with RMDs to manage your taxable income efficiently
- Consider a “backdoor Roth” strategy if your income exceeds direct Roth contribution limits
- Remember that you must have earned income to make IRA contributions, regardless of age
- If still working, check if your 401(k) plan allows for delayed RMDs while employed
6. Moving to a Tax-Free State Guarantees Tax-Free Retirement Withdrawals
Relocating to a state with no income tax might seem like a foolproof strategy for minimizing retirement taxes, but the reality is considerably more complex. Many retirees fail to consider the comprehensive tax picture, which extends beyond just income tax.
States without income taxes typically compensate with higher property taxes, sales taxes, or other assessments that can offset the presumed savings.
Additionally, strict residency rules may require you to sever nearly all ties with your former state to avoid taxation, while some states maintain tax agreements that allow them to tax retirement income based on where it was earned rather than where you currently reside. A holistic analysis of your complete tax situation is essential before making relocation decisions.
- Tips:
- Research all state and local taxes (property, sales, estate) before relocating
- Understand residency requirements to ensure you legally establish domicile in your new state
- Consider the potential “tax drag” on your retirement if your former state has special rules
- Factor in non-tax costs like healthcare, housing, and travel when evaluating a potential move
- Consult with a tax professional familiar with both states’ tax laws before relocating
7. Self-Directed IRAs Allow Unrestricted Investments Like Real Estate or Crypto
Self-directed IRAs provide access to alternative investments beyond traditional stocks and bonds, but they operate under strict IRS regulations that limit certain activities and transactions.
While these accounts do permit investments in real estate, private businesses, cryptocurrency, and other alternative assets, they come with substantial compliance requirements. The IRS prohibits self-dealing transactions and investments involving “disqualified persons” including yourself, your spouse, lineal descendants, and entities they control.
Violations of these rules can trigger catastrophic tax consequences, including immediate taxation of the entire account value plus penalties. Additionally, certain assets like collectibles and life insurance remain explicitly prohibited regardless of the self-directed structure.
Tips:
- Work with a specialized custodian experienced in self-directed IRA compliance
- Thoroughly document all transactions to demonstrate arm’s-length dealings
- Avoid personal use of any assets held in your self-directed IRA (especially real estate)
- Be aware of UBTI (Unrelated Business Taxable Income) which can trigger taxes within your IRA
- Consider establishing a checkbook LLC within your IRA for greater investment flexibility
8. Inherited Retirement Accounts Still Offer a “Stretch” Lifetime Payout
The SECURE Act of 2019 fundamentally transformed the rules for inherited retirement accounts, eliminating the popular “stretch IRA” strategy for most non-spouse beneficiaries. Prior to this legislation, beneficiaries could stretch distributions over their entire lifetime, maximizing tax-deferred growth.
Now, most beneficiaries must withdraw the entire account within 10 years of inheriting, potentially pushing them into higher tax brackets and diminishing the account’s long-term value.
Important exceptions exist for “eligible designated beneficiaries” including surviving spouses, disabled or chronically ill individuals, beneficiaries not more than 10 years younger than the account owner, and minor children of the account owner (though only until they reach majority age, at which point the 10-year rule applies).
Tips:
- Review and update your beneficiary designations in light of the SECURE Act changes
- Consider Roth conversions to reduce tax impacts on your beneficiaries
- Explore life insurance as an alternative wealth transfer strategy for legacy planning
- If you’re a beneficiary, develop a strategic withdrawal plan to minimize tax impacts
- Consult with an estate planning attorney about trust options that might provide tax flexibility
9. Target-Date Funds Automatically Align With Your Personal Risk Tolerance
Despite their convenient “set it and forget it” marketing, target-date funds follow standardized glide paths that may not align with your specific retirement timeline, goals, or risk tolerance. These funds typically shift toward conservative allocations based solely on your expected retirement date, often becoming too conservative too early and potentially sacrificing significant growth opportunities.
The degree of conservatism varies dramatically between fund providers, with some maintaining substantial equity exposure into retirement while others shift heavily toward fixed income.
Additionally, these funds generally don’t account for external factors like pension income, Social Security claiming strategies, or other assets that might justify a more customized approach to retirement portfolio construction.
Tips:
- Compare the glide paths of different target-date fund providers before investing
- Look beyond the target date to understand the actual asset allocation at various points
- Consider your complete financial picture when evaluating if a target-date fund is appropriate
- Be aware of the expense ratios, which can vary significantly between providers
- Reassess periodically whether the fund’s allocation still matches your needs and goals
10. Taking RMDs Won’t Affect Your Medicare Premiums
Required Minimum Distributions can have unexpected financial consequences beyond just the direct tax impact, particularly by increasing your Modified Adjusted Gross Income (MAGI) used to calculate Medicare premium surcharges.
These Income-Related Monthly Adjustment Amounts (IRMAA) can substantially increase your Medicare Part B and Part D premiums if your income crosses certain thresholds, potentially adding thousands of dollars annually to your healthcare costs.
The surcharges operate on cliff thresholds, meaning even $1 over a bracket can trigger hundreds in additional premiums. This creates a complex planning challenge where the timing and amount of retirement account withdrawals must be carefully coordinated with other income sources to manage both income taxes and potential Medicare premium increases.
Tips:
- Understand the IRMAA threshold brackets and how close your income is to each cliff
- Consider Roth conversions before age 63 (two years before Medicare eligibility)
- Explore Qualified Charitable Distributions (QCDs) to satisfy RMDs without increasing MAGI
- Time large income events (like property sales) to avoid having multiple high-income years
- Appeal IRMAA determinations if you’ve experienced a life-changing event like retirement
Final Thoughts and Tips
Retirement planning involves navigating numerous complex and often counterintuitive rules that can significantly impact your financial security. Many commonly held beliefs about retirement accounts are based on outdated information or oversimplifications that fail to account for recent legislative changes and the nuanced interaction between different financial strategies.
- Regularly review your retirement plan with qualified financial and tax professionals
- Stay informed about legislative changes that may impact retirement planning strategies
- Coordinate your retirement account strategies with your overall estate and tax planning
- Consider how each financial decision might trigger unexpected consequences in other areas
- Remember that personalized strategies typically outperform generic retirement planning advice
- Document your retirement planning decisions and the reasoning behind them for future reference
- Balance tax efficiency with other goals like liquidity, growth potential, and estate planning
- Periodically reassess your retirement timeline and adjust your strategies accordingly
