Common 401(k) rollover mistakes and how to avoid them

When you leave a job, retire, or change careers, your old 401(k) doesn’t just disappear—but many people make costly mistakes with an old 401(k) without realizing it. A rollover is more than paperwork. When done incorrectly, it can trigger unnecessary taxes, penalties, and long-term damage to your retirement plan.
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Here’s what you need to know to avoid the most common 401(k) rollover mistakes—and protect what you’ve worked so hard to save.

Mistake #1: Treating Your 401(k) Like an ATM

A 401(k) can feel like “free money” when you leave a job—but cashing it out early is one of the most expensive mistakes you can make.

When you withdraw funds before age 59½:

• You may owe ordinary income taxes
• You’ll likely pay a 10% IRS penalty
• You permanently lose years of tax-deferred growth
  
  

After taxes and penalties, many people end up with only about two-thirds of their original balance—and that doesn’t include the long-term growth they’ve given up.

Bottom line: A 401(k) is designed for retirement account growth, not short-term spending.

Mistake #2: Triggering Higher Taxes by Rolling Over Incorrectly

A poorly handled rollover can still cause tax problems. 401(k) distributions are treated as ordinary income by the IRS.

If a rollover mistake causes your funds to be counted as a distribution, it could:

• Push you into a higher tax bracket
• Increase the taxes you pay on your income
• Create a surprise tax bill at year-end
  
  

The goal isn’t to avoid taxes entirely—but to control when and how you pay them.

Mistake #3: Missing the Power of Tax-Deferred Growth

One of the biggest advantages of a 401(k) is tax deferral—your money grows without being taxed each year. Over time, this can make a dramatic difference. In long-term examples, tax-deferred accounts can grow significantly more than taxable accounts, even when earning the same rate of return.

When you cash out or mishandle a rollover, you don’t just lose money today—you give up decades of potential growth.

Mistake #4: Using an Indirect Rollover Without Understanding the Rules

Many people don’t realize there are two types of rollovers:

Indirect Rollover (High Risk)

• You receive the money personally
• You have 60 days to redeposit it
• Your employer withholds 20% for taxes
• Make this one mistake and the IRS may treat it as a withdrawal
  
  

To complete this rollover correctly, you must replace the withheld 20% out of pocket—something many people can’t or don’t do.

Direct Rollover (Safe Option)

• Funds move directly from one account to another
• You never take possession of the money
• No withholding, no 60-day deadline
• Far fewer opportunities for mistakes
  
  

This is why many professionals consider a direct rollover the most mistake-proof option.

Mistake #5: Losing Track of Old 401(k)s

With people changing jobs more often than ever, it’s surprisingly easy to forget about an old retirement account.

Trillions of dollars ($2.13 trillion as of 2025) in retirement savings have been lost simply because:

• Employers lost contact with former employees
• People moved or changed names
• Accounts weren’t consolidated
  
  

Lost accounts mean lost income—for you and your beneficiaries. Consolidating accounts or rolling them into an IRA can make your retirement easier to manage and harder to lose.

Mistake #6: Assuming One Move Fits Everyone

Rolling an old 401(k) into:

• An IRA
• A new employer’s 401(k)
• A tax-free strategy
• Or leaving it where it is
  
  

…can all make sense depending on your situation.

Factors like taxes, fees, investment control, income needs, and future life events all matter. One decision can shape the rest of your retirement—so it shouldn’t be made in isolation.

One Wrong Move Could Could Be Very Costly.

A 401(k) rollover is a major financial decision—not a formality.

Handled correctly, it can:

• Preserve tax advantages
• Improve control
• Reduce future risk
• Help create sustainable retirement income
  
  

Handled incorrectly, it can trigger penalties, taxes, and missed opportunities that are difficult—or impossible—to undo.

Education and guidance matter.

​You can read more about your options with an old 401(k) in our "What Are Your Options With An Old 401(k)" article

This article is for educational purposes only and does not constitute tax, legal, or investment advice. Individual situations vary, and you should consult with one of our qualified professionals before making financial decisions.