If you decide to move an old 401(k), a properly handled direct rollover generally avoids the mandatory 20% withholding and 60-day redeposit problem that can arise when an eligible employer-plan distribution is paid to you personally. But direct rollover mechanics are only one part of the decision. Age, plan loans, employer stock, RMDs, account type, fees, and what happens after the money arrives can also matter.
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Mistake 1: Taking an Indirect Rollover Without Understanding Withholding
If an eligible rollover distribution from a 401(k) is paid to you personally, the taxable portion is generally subject to 20% federal income tax withholding, even if you intend to roll the money over later.
That withholding is not an IRS penalty. It is tax withholding. The problem is that if you want to roll over the entire eligible amount, you generally need to replace the withheld amount from another source within the rollover period.
Example: if an eligible $50,000 pre-tax distribution is paid to you, the plan generally withholds $10,000 and you receive $40,000. To roll over the full $50,000, you generally need to deposit $50,000 into the receiving eligible account within the allowed period. If you roll over only $40,000, the $10,000 not rolled over is generally treated as a distribution and may be taxable. A 10% additional tax may also apply if no exception is available.
How to avoid it: If a rollover is the decision you have made, ask the old plan for a direct rollover and follow the receiving institution's exact instructions.
Mistake 2: Missing the 60-Day Rollover Deadline
When an eligible retirement-plan distribution is paid to you and you intend to complete a 60-day rollover, you generally have 60 days from the date you receive the distribution to contribute the eligible amount to another retirement plan or IRA.
Missing the deadline can turn an intended rollover into a taxable distribution. The IRS has limited waiver and self-certification procedures for certain circumstances, but relief should not be assumed.
How to avoid it: Prefer a direct rollover when appropriate. If you already received a distribution personally, read our 60-Day Rollover Rule guide immediately and confirm the deadline from your actual receipt date.
Mistake 3: Rolling Money Into the Wrong Account Type
A rollover can be tax-efficient or taxable depending on what kind of money is moving and where it goes.
| Money being moved | Possible destination | General federal tax treatment |
|---|---|---|
| Pre-tax 401(k) | Traditional IRA | An eligible direct rollover generally does not create current federal income tax. |
| Pre-tax 401(k) | Roth IRA | The previously untaxed amount is generally included in income for the year of the rollover. |
| Designated Roth 401(k) | Roth IRA | Can generally be rolled directly to a Roth IRA. |
| Mixed tax sources | Depends on source | Confirm pre-tax, designated Roth, and after-tax amounts before submitting instructions. |
How to avoid it: Ask the old plan for a source breakdown and ask the receiving institution where each source should go. Do not treat a pre-tax-to-Roth move as if it were the same as a pre-tax-to-Traditional-IRA rollover.
Mistake 4: Forgetting to Check Whether the Rollover Arrived in Cash
Completing the transfer does not always mean the retirement money is invested. Depending on the institutions and transaction, rollover proceeds may arrive in a cash or settlement position.
The mistake is not holding cash briefly while a transfer settles. The mistake is assuming the new account automatically recreated the investments from the old 401(k) without checking.
How to avoid it: After the rollover settles, confirm the full expected amount arrived, confirm the tax source went to the intended account, and review the investment status. If you need investment advice, use a qualified professional rather than assuming the default cash position matches your long-term plan.
Mistake 5: Ignoring an Outstanding 401(k) Loan
An outstanding plan loan can create a different rollover problem when employment ends. A plan may reduce your account balance to repay an unpaid loan. This is called a plan loan offset.
A qualified plan loan offset caused by severance from employment or plan termination can have a longer rollover period than the normal 60-day rule. In general, an eligible qualified plan loan offset may be rolled over through the due date, including extensions, for the federal income tax return for the year in which the offset occurs.
A deemed distribution is different. The IRS states that a deemed distribution is not eligible for rollover, while a plan loan offset may be.
How to avoid it: Before requesting a rollover, ask the plan administrator whether you have an outstanding loan, whether an offset will occur, and whether it qualifies for the extended rollover period.
Mistake 6: Rolling to an IRA Without Considering the Age-55 Separation Exception
If you separate from service during or after the calendar year in which you reach age 55, qualifying distributions from that employer's qualified plan may be exempt from the 10% additional tax on early distributions.
That specific separation-from-service exception applies to qualified employer plans and does not apply to IRA distributions. This does not mean that someone age 55 should never roll over a 401(k). It means the possible loss of that plan-specific exception should be considered before the money moves if withdrawals may be needed before age 59½.
How to avoid it: If the age-55 rule may be relevant, compare keeping some or all of the money in the employer plan with the IRA alternative before authorizing the rollover.
Mistake 7: Cashing Out Without Checking the Tax Consequences and Exceptions
A cash distribution of previously untaxed 401(k) money is generally included in income. If you are under age 59½, a 10% additional tax may also apply unless an exception is available.
Do not assume every early distribution receives the 10% additional tax, and do not assume an exception applies without checking. The age-55 separation exception above is one example of why the facts matter.
How to avoid it: Before cashing out, compare the tax impact with leaving the money in the plan, moving it to a new employer plan, or completing a rollover.
Mistake 8: Relying on an Outdated $5,000 Small-Balance Rule
Older retirement articles often cite a $5,000 involuntary cash-out threshold. SECURE 2.0 increased the federal statutory limit to $7,000 for qualifying mandatory distributions after December 31, 2023. A plan may use a lower threshold, so the plan document still matters.
For certain mandatory distributions of more than $1,000, if the participant does not make an affirmative election, federal rules generally require the plan to move the distribution by direct rollover into an IRA established for the participant.
How to avoid it: Keep your address current, read plan notices, and make an affirmative decision rather than assuming a small old 401(k) will remain untouched indefinitely.
Mistake 9: Rolling Employer Stock to an IRA Without Evaluating NUA First
If a 401(k) contains employer stock, special net unrealized appreciation (NUA) tax treatment may be available in certain lump-sum distribution situations. If employer securities are rolled into a Traditional IRA, later IRA withdrawals follow the normal IRA distribution rules. IRS guidance notes that special lump-sum tax treatment is not available for those later IRA distributions.
NUA is not automatically beneficial. Its usefulness depends on facts such as cost basis, current value, tax rates, diversification needs, and the distribution structure.
How to avoid it: If your old 401(k) holds employer stock, pause before rolling that stock to an IRA and consider qualified tax advice on the available alternatives.
Mistake 10: Assuming an IRA Is Automatically Cheaper Than the 401(k)
An IRA may offer more investment choices, but that does not automatically make it the lower-cost account. Employer plans can have administrative fees, investment expenses, and service fees. IRAs can also have advisory fees, fund expenses, trading costs, account charges, or other costs depending on the provider and service model.
The Department of Labor recommends comparing fees as one factor alongside services and investment choices, and notes that cheaper is not necessarily better.
How to avoid it: Compare the actual old-plan costs with the actual IRA costs before moving. Our Rollover IRA Platforms section can help organize provider research, but verify current provider fee schedules directly before making a decision.
Mistake 11: Trying to Roll Over an Amount That Is Not Eligible
Not every retirement-plan payment can be rolled over. For example, required minimum distributions, certain hardship distributions, and certain deemed loan distributions are not eligible rollover distributions.
If an RMD applies to you, determine the required amount before moving the remaining eligible balance. Do not assume the entire account can simply be sent to the receiving IRA.
How to avoid it: Ask the plan administrator which portion of the distribution is eligible for rollover before signing the distribution election.
A Common Misconception: The One-Rollover-Per-Year Rule
The IRS one-rollover-per-year rule is important, but it is frequently described too broadly.
The limit generally applies to IRA-to-IRA 60-day rollovers. It does not apply to:
- Plan-to-IRA rollovers, including a 401(k)-to-IRA rollover
- Plan-to-plan rollovers
- IRA-to-plan rollovers
- Trustee-to-trustee transfers between IRAs
- Traditional IRA-to-Roth IRA conversions
So someone rolling an old 401(k) into an IRA should not be told that the transaction itself uses up the IRA one-rollover-per-year limit.
401(k) Rollover Mistakes Checklist
| Before you authorize the rollover | What to verify |
|---|---|
| Distribution method | Is this a direct rollover, or will the payment be made to you personally? |
| Check payee | If a check is used, is it payable to the receiving plan or IRA rather than to you? |
| Tax sources | How much is pre-tax, designated Roth, or after-tax? |
| Receiving account | Is the destination Traditional IRA, Roth IRA, or another employer plan? |
| Outstanding loan | Will a plan loan offset occur, and what rollover deadline applies? |
| Age-based rules | Could the separation-from-service exception at age 55 matter? |
| Employer stock | Should NUA treatment be evaluated before the stock moves? |
| RMD | Is any portion required to be distributed rather than rolled over? |
| Fees | What are the total old-plan and receiving-account costs? |
| After arrival | Did the full amount arrive, and is the money invested as intended? |
Still deciding what to do with the old 401(k)?
Start with our step-by-step guide to the choices after leaving a job, then use the checklist before you submit any rollover forms.
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Turn the checklist into a working rollover file.
The 2026 401(k) Rollover Workbook adds call scripts, deadline tracking, paperwork logs, provider comparisons, and tax-season worksheets.
Frequently Asked Questions
What is a common 401(k) rollover mistake?
One common mistake is having an eligible distribution paid to you personally without understanding the 20% withholding and 60-day rollover rules. Another is moving money before checking account type, plan loans, age-based exceptions, employer stock, fees, or RMD requirements.
What if the rollover check is mailed to me?
Look at who the check is payable to. The IRS states that a distribution check sent to you but made payable to the receiving plan or IRA is not subject to the mandatory 20% withholding that applies when the eligible distribution is paid to you personally.
Does the one-rollover-per-year rule apply to a 401(k)-to-IRA rollover?
No. The IRS says the one-per-year limit does not apply to plan-to-IRA rollovers.
Can I fix a missed 60-day rollover deadline?
Possibly, depending on the facts. The IRS provides limited waiver and self-certification procedures. Do not assume relief is automatic.
Should everyone roll an old 401(k) into an IRA?
No. An IRA can be useful, but leaving money in the old plan or moving it to a new employer plan may also be reasonable. Compare fees, investments, services, withdrawal rules, creditor protections, and special plan features before deciding.
Primary Sources and Editorial Notes
- IRS: Rollovers of retirement plan and IRA distributions
- IRS Topic 413: Rollovers from retirement plans
- IRS: Plan loan offsets
- IRS: Exceptions to tax on early distributions
- IRS Internal Revenue Bulletin 2026-06
- IRS Publication 575
- U.S. Department of Labor: A Look at 401(k) Plan Fees
Editorial note: This guide uses primary government sources for rollover rules. It provides general educational information, not individualized tax, legal, or investment advice. Plan terms and personal circumstances vary.