There are a record number of 401(k) millionaires so far this year. A whopping 497,000 Americans have accumulated at least $1 million through their 401(k)s, a 2024 report from Fidelity Investments found, which is up 2.5% from earlier this year.

Investing in a 401(k) is a powerful way to save for retirement, and this type of account boasts plenty of advantages. Matching contributions can instantly double your savings, for example, while high contribution limits can help you save more than you might with other retirement accounts.

In 2024, workers can contribute up to $23,000 per year to their 401(k) plans. But if you’re saving that much each year, it may be difficult or even impossible to contribute to other accounts — potentially robbing you of some valuable perks. While these accounts have their place, there are a few unfortunate truths about only investing in a 401(k) for retirement.

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1. You’ll owe taxes in retirement

Retirement accounts like 401(k)s and traditional IRAs are tax-advantaged, meaning you can deduct your contributions upfront. The downside to this approach, though, is that you’ll owe income taxes when you retire and start making withdrawals.

This isn’t necessarily a bad thing, especially if you’re already accounting for taxes in your retirement plans. But saving for retirement is tough enough as it is, and having to pay thousands of dollars per year in taxes can quickly eat away at your budget.

In some cases, it can be smart to also contribute to a Roth account, such as a Roth 401(k) or Roth IRA. You’ll pay taxes on your initial contributions with these types of accounts, but your withdrawals will be tax-free. By saving in both a 401(k) and a Roth account, you can take advantage of the 401(k)’s perks while limiting what you pay in taxes come retirement.

2. You may not have many investment options

You’ll generally have a handful of mutual funds to choose from when contributing to a 401(k), and the selection will vary by company. There’s nothing inherently wrong with mutual funds, but not all funds are created equal.

Some funds might offer lower-than-average investment returns, for example, while others might charge high fees. When you have little control over the investments available to you, your long-term savings could suffer for it.

IRAs, in general, offer far more investment options than 401(k)s. Whether you’re a more hands-on investor or simply don’t like the options available in your 401(k), investing at least some money in an IRA or other brokerage account can help maximize your earnings over time.

3. Early retirement can be more difficult

Many workers dream of early retirement, but depending on just how early you plan to retire, a 401(k) can pose an extra challenge.

In general, you cannot start withdrawing from a 401(k) before age 59 1/2 without facing a 10% penalty on the amount you withdraw. There are some exceptions to this fine, like if you’ve been financially impacted by a natural disaster, for example, or become disabled. But if you’re simply withdrawing to cover everyday expenses, you can expect a penalty.

In some cases, you can take penalty-free distributions if you leave your job after turning 55 years old. Not all plans offer this option, though, and you can only withdraw funds from the 401(k) through your current employer — meaning you can’t roll your savings over to an IRA or withdraw from any previous 401(k) accounts.

IRAs also have similar restrictions, imposing penalties for withdrawing prior to age 59 1/2. But there are other types of accounts — such as a taxable brokerage account, for example — that don’t have age requirements for withdrawals. If you plan to retire in your 50s or earlier, having at least a few years’ worth of savings in an account other than a 401(k) can save you thousands of dollars in penalties.

Maxing out your 401(k) is an incredible accomplishment, and if you’re able to save that much per year, give yourself a pat on the back. But by spreading your savings across other types of accounts, too, you can take advantage of a variety of perks and set yourself up for a more secure retirement.

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