8 Biggest Mistakes We See in the State of Michigan 401 (K)

And How to Navigate Them Before It Costs You Your Retirement

When you retire has a direct impact on when and how you can access your investment funds.

Standard 401(k) Rule (Age 59½):

Withdrawals before age 59½ are generally subject to:

• A 10% IRS early withdrawal penalty, and
• Ordinary income taxes.

Key Exception – The Rule of 55:

• If you leave your employer in the year you turn age 55 or later (50 for certain public safety employees), you may take withdrawals from that employer’s 401(k),
• These withdrawals are not subject to the 10% early withdrawal penalty (ordinary income taxes still apply)

457 Plan Advantage:
If you are planning to retire before age 55, the State of Michigan 457 plan provides enhanced flexibility, including:

• Access to funds immediately upon separation from service
• No early withdrawal penalty, regardless of age

Why this matters:
If you’re considering early retirement - especially in your 50s - understanding these rules is critical to building an effective income strategy.

Most people default into a Traditional 401(k) without revisiting the decision.

But the real question is:
        Do you want the tax break today—or tax-free income later?

 Overview of Tax Treatment:

• Traditional 401(k): Pre-tax contributions; grows tax-deferred; withdrawals are taxable
• Roth 401(k): After-tax contributions; grows tax-free; qualified withdrawals are tax-free

Example:
If you have $1 million in a Traditional 401(k), a portion will go toward taxes upon withdrawal. At a 20% tax rate, that could mean $200,000 paid in taxes.

A Roth 401(k), by contrast, could allow you to withdraw the full $1 million tax-free (assuming rules are met).

 Common issues:

• Overloading pre-tax accounts → higher taxable income in retirement
• Missing Roth opportunities during lower-income years
• No long-term tax diversification strategy
  

What to do:

• Treat taxes as part of your investment strategy
• Be aware of your current tax rate and potential tax rates in retirement
• Potential benefit to blend pre-tax and Roth contributions based on your situation (taxes are due at the time of conversion)

One of the most common - and costly - mistakes is having the wrong level of risk for your stage of life.

And it goes both ways.

We often see individuals who are:

• Taking too much risk, exposing themselves to unnecessary volatility
• Taking too little risk, limiting long-term growth potential

Your Investment Strategy Should Evolve With Your Life 
Your investment strategy should not be static - it should adjust as your life and goals change. 

Key life stages to consider:

• Early Career (25–40): Focus on growth and long-term accumulation
• Mid Career (40–55+): Balance growth with increasing risk awareness
• Pre-Retirement (5 years out): Shift in focus towards protecting your investments balances
• Retirement: Focus on preservation, income, and sustainability

State of Michigan employees often have:

• Pension benefits
• 401(k) / 457 plans
• Social Security eligibility
• Unique healthcare considerations

But these benefits are rarely viewed together.

The mistake:
Managing each account in isolation instead of building a coordinated plan.

The impact:

• Inefficient withdrawals
• Higher taxes
• Missed optimization opportunities

Bottom line:
Your State Retirement accounts need to evaluated with your other benefits to maximize your financial benefits and opportunities. 

The State of Michigan retirement system can be complex - but you don’t have to navigate it alone.

At GNZ Financial, we have extensive experience helping State of Michigan employees build a clear, confident path toward retirement.

To support you, we offer two opportunities to get started: