The average worker changes jobs many times over a career, often leaving a trail of old 401(k) accounts behind. Consolidating them through a rollover can make your retirement easier to manage and invest intentionally. But the IRS rules around rollovers are specific, and small mistakes can be expensive.
Mistake 1: Taking the check instead of a direct rollover
There are two ways to move money out of an employer plan. In a direct rollover, the funds go straight from your old plan to the new plan or IRA — trustee to trustee — with no taxes withheld. In an indirect rollover, the plan pays you, and the IRS requires the plan to withhold 20% for federal taxes.
Mistake 2: Missing the 60-day deadline
With an indirect rollover, you have 60 days to deposit the money into a new retirement account. Miss the deadline and the distribution generally becomes taxable income — and if you are under 59½, it may also be subject to a 10% additional tax.
Mistake 3: Not replacing the 20% withheld
This one surprises many people. If your plan withheld 20% on an indirect rollover, you must make up that 20% from other funds to roll over the full amount. Otherwise, the withheld portion is treated as a taxable distribution. You may get the withholding back at tax time, but only if you replaced it.
Mistake 4: Doing more than one IRA-to-IRA rollover a year
The IRS limits indirect IRA-to-IRA rollovers to one in any 12-month period, regardless of how many IRAs you own. Direct trustee-to-trustee transfers between IRAs are not subject to that limit — another reason to keep money moving directly between institutions.
Mistake 5: Rolling over without a strategy
A rollover is a moment to make decisions, not just move paperwork. Consider:
- Whether to keep money in your old plan, move it to your new employer’s plan, or roll it into an IRA.
- Whether a partial Roth conversion makes sense in a lower-income year.
- How the investments fit your timeline and risk tolerance.
- Whether part of the balance should be positioned for guaranteed income in retirement.
- Special rules for company stock held inside a 401(k).
Rollover rules are detailed, and the right choice depends on your situation. Talk with a professional — and your tax advisor — before moving retirement money. Source: IRS, “Rollovers of Retirement Plan and IRA Distributions.”
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