Seven costly rollover mistakes

1. Taking the check in your own name (the indirect rollover)

The single most expensive mechanical error. If the distribution is payable to you rather than transferred custodian-to-custodian, the plan must withhold 20% for federal tax under IRC §3405(c) — and to complete a tax-free rollover you must redeposit the full 100% within 60 days, fronting the withheld portion yourself. Miss the window and the shortfall is taxable income, generally plus a 10% additional tax before age 59½. The fix costs nothing: say the words "direct rollover" and give the receiving custodian's payee instructions. The full mechanics are in our rollover guide.

2. Cashing out because the balance seems small

A $12,000 balance at 30 feels like a windfall and cashes out to roughly $8,000–$9,000 after federal tax and penalty — more after California's own tax and 2.5% early-distribution penalty. The real cost is the future: at a purely hypothetical 6% annual return, $12,000 left invested for 35 years would be roughly $92,000 — an illustration, not a projection or promised return, but the order of magnitude is the point. Cash-outs at job change are how retirement accounts quietly evaporate; the Employee Benefit Research Institute has long identified this "leakage" as a major drain on retirement savings.

3. Rolling employer stock without checking NUA first

If your 401(k) holds appreciated shares of your employer's stock, the tax code offers a one-shot treatment called net unrealised appreciation (IRC §402(e)(4); IRS Publication 575). Move the shares to a taxable account as part of a qualifying lump-sum distribution and you pay ordinary income tax only on the original cost basis; the appreciation is taxed later at long-term capital-gains rates when sold. Roll those shares into an IRA instead and the option is gone permanently — every dollar becomes ordinary income on withdrawal. NUA isn't always the right choice (it's a basis-versus-appreciation calculation), but it must be evaluated before the rollover, because the rollover forecloses it.

4. Wrecking a future backdoor Roth with the pro-rata rule

Rolling a pre-tax 401(k) into a traditional IRA seems tidy — until you try a backdoor Roth. The pro-rata rule (reported on IRS Form 8606) taxes any conversion based on the ratio of pre-tax to after-tax money across all your traditional, SEP and SIMPLE IRAs. A large pre-tax rollover IRA makes every future backdoor conversion mostly taxable. If your income puts you near the Roth IRA phase-out and the strategy matters to you, consider keeping pre-tax money inside a 401(k) — the old plan or the new employer's — instead of an IRA. Details in the Roth vs traditional guide.

5. Quitting weeks before a match vests — or a contribution lands

Employer matching and profit-sharing contributions often vest on a schedule — commonly "cliff" vesting at 2–3 years or graded over up to 6 (the limits are set by ERISA and the Internal Revenue Code; your plan's Summary Plan Description states yours). Leave one payroll before a vesting date and the unvested match is forfeited back to the plan. Similarly, some plans make matching or annual contributions only to employees on the payroll at year-end. Nobody suggests staying years in a job for a match — but if you're weeks from a vesting cliff or an annual contribution date, the calendar is worth checking before you set a departure date.

6. Forgetting the 401(k) loan that comes due at separation

Many plans make outstanding loans due when you leave. If unpaid, the balance becomes a loan offset — treated as a distribution, taxable, and generally subject to the 10% additional tax before 59½. Two facts soften this if you act: since the 2017 tax law, a qualified plan loan offset can be rolled over (with money from any source) as late as your tax-filing deadline including extensions for that year — far longer than 60 days (IRC §402(c)(3)(C); IRS Publication 575). But the mistake is common because nobody re-reads their loan paperwork while negotiating a new job. If you have a plan loan, its repayment terms belong in your departure math.

7. Losing track of old accounts entirely

It sounds impossible until you've changed jobs four times. Plans get merged, recordkeepers change, mail goes to old addresses, and small balances get force-transferred into "safe harbor IRAs" invested in cash and eroded by fees. Congress thought the problem serious enough that SECURE 2.0 ordered the creation of a national Retirement Savings Lost and Found, run by the Department of Labor, which is now online at dol.gov. If you might have orphaned money: check the Lost and Found, your old tax returns (a W-2 Box 12 code D shows you deferred), former employers' HR departments, and the National Registry of Unclaimed Retirement Benefits. Then consolidate deliberately — using a direct rollover, having read mistakes #1 through #4.

The pattern behind all seven

Every mistake on this list shares a shape: an irreversible step taken before a five-minute check. The 20% withholding, the lost NUA election, the pro-rata contamination, the forfeited match — none can be undone after the fact, and all are avoidable with one look at the right document beforehand. That's the entire case for slowing a rollover down by a week. The money has usually been growing for a decade; it can wait five more days for you to read the Summary Plan Description. Our rollover service runs exactly this checklist, and our rollover cost comparison handles the fee arithmetic.

Common questions