Avoiding Rollover Mistakes When Changing Jobs

Changing jobs is a common point where retirement savings get mismanaged. A single wrong choice — taking an indirect distribution instead of a direct rollover, missing the 60‑day deadline, or rolling after‑tax dollars into the wrong account — can cost thousands in taxes, penalties, and lost future growth. In my practice over 15 years, I’ve helped clients untangle rollovers and avoid preventable tax events; this guide gives clear, practical steps you can follow.

Quick checklist: what to do before you move money

  • Confirm your options with the old plan administrator and your new employer’s plan.
  • Ask whether a direct trustee‑to‑trustee rollover is allowed and how they handle rollovers.
  • Verify whether the old plan accepts rollovers of after‑tax contributions or employer stock (NUA rules).
  • Compare fees, investment choices, and creditor protection between the old plan, new plan, and IRAs.
  • If you receive a distribution check, confirm whether it is payable to you or directly to the new trustee.

Common rollover mistakes and how to avoid each one

  1. Taking the distribution into your hands (indirect rollover) and missing the 60‑day deadline
  • Mistake: You receive a check made payable to you and deposit it into your bank account. The plan withholds 20% for federal taxes. If you don’t complete a rollover within 60 days for the full amount (including replacing the withheld 20%), the IRS treats the shortfall as a taxable distribution, and you may owe the 10% early withdrawal penalty if you are under 59½.
  • How to avoid: Always request a direct rollover (trustee‑to‑trustee transfer). If you must take a distribution, be prepared to replace the withheld amount within 60 days and file IRS forms accordingly. See the IRS rollover rules for details (IRS) (https://www.irs.gov/retirement-plans/plan-participant-employee/rollover-ira).
  1. Confusing traditional and Roth rollovers
  • Mistake: Rolling pre‑tax 401(k) dollars into a Roth IRA without planning for the tax bill. That conversion is taxable in the year of conversion.
  • How to avoid: Decide whether you want a Roth conversion and calculate the tax impact. If you prefer to keep the money tax‑deferred, roll into a traditional IRA or a traditional employer plan.
  1. Rolling after‑tax contributions incorrectly
  • Mistake: After‑tax (non‑Roth) contributions in a 401(k) have different treatment. Rolling them into a traditional IRA can cause tax planning complications; sometimes rolling after‑tax dollars to a Roth or keeping them in the plan (if the plan supports it) is better.
  • How to avoid: Ask your plan administrator how after‑tax contributions will be processed and consider splitting the rollover: pre‑tax to traditional IRA, after‑tax to Roth IRA. For employer stock, review Net Unrealized Appreciation (NUA) rules before moving (IRS guidance covers special cases) (https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers).
  1. Ignoring plan rules and surrender charges
  • Mistake: Some plans restrict rollovers for participants under certain conditions or apply surrender fees for transferring proprietary funds.
  • How to avoid: Read your summary plan description (SPD) and speak with the plan administrator to learn any restrictions or fees.
  1. Overlooking creditor protection and special plan benefits
  • Mistake: Moving money from a 401(k) with strong ERISA creditor protection to an IRA (which has different protection under federal/state law) without considering legal exposure.
  • How to avoid: Evaluate creditor protection, defined‑benefit protections, or special loan provisions before moving funds. In certain cases, leaving funds in the old plan temporarily makes sense.
  1. Consolidating blindly and paying higher fees
  • Mistake: Consolidating accounts into a new plan or IRA that has higher fees or limited investment options.
  • How to avoid: Compare the underlying investment expenses (expense ratios, fund fees), advisory fees, and the new plan’s fund lineup before combining accounts. Use consolidation to simplify only when it improves net returns or reduces administrative friction.

How rollovers work: direct vs indirect

  • Direct rollover (trustee‑to‑trustee transfer): The plan transfers funds directly to the receiving plan or IRA. This is the safest route — no withholding and no immediate tax consequences.
  • Indirect rollover: The distribution is paid to you and you have 60 days to move the full amount to another qualified plan or IRA. The distributing plan typically withholds 20% for federal taxes, which you must replace from other funds to avoid taxes on the withheld portion.

The IRS strongly favors direct rollovers because they eliminate most common mistakes (IRS rollover guidance) (https://www.irs.gov/retirement-plans/retirement-topics-rollovers).

Tax rules to know (current as of 2025)

  • 60‑day rule: Indirect rollovers must be completed within 60 days. Missing the deadline usually results in taxable income plus potential 10% early withdrawal penalty if under age 59½ (exceptions exist for hardships and certain casualty/disaster relief) (IRS).
  • Mandatory 20% withholding: Applies to certain distributions paid to the participant that are eligible for rollover but not directly rolled over. You’ll need to replace the withheld amount in the 60‑day period to avoid taxation.
  • Roth conversions: Moving pre‑tax funds into a Roth converts taxable basis — you’ll owe ordinary income tax in the year of conversion.

For full IRS details, see the rollover pages: https://www.irs.gov/retirement-plans/plan-participant-employee/rollover-ira and https://www.irs.gov/retirement-plans/retirement-topics-rollovers.

Step-by-step: completing a safe rollover

  1. Call the old plan administrator and tell them you want a direct rollover to your new plan or IRA. Ask for the exact paperwork and the receiving account’s trustee information.
  2. Open the receiving account in advance (new employer plan or IRA) so transfer instructions are complete.
  3. Request the transfer in writing and confirm whether the old plan will issue a check payable to the receiving trustee or initiate an electronic transfer.
  4. Confirm expected timing and follow up until funds land in the receiving account.
  5. Verify the transaction on your statements and keep records for tax reporting. You’ll receive Form 1099‑R from the distributing plan and Form 5498 from the receiving IRA (if applicable) for your tax records.

When it can make sense to leave money in the old plan

  • Strong, low‑cost institutional funds or unique investment choices not available elsewhere.
  • Superior creditor protection under ERISA for certain legal circumstances.
  • If plan loans are in place and you want to preserve loan terms (rules vary).

If you choose to leave money in the old plan, document your reason and revisit the decision periodically.

Consolidation: benefits and cautions

Pros: fewer accounts to manage, potential for lower fees if you choose a low‑cost IRA, easier rebalancing.
Cons: IRAs may have weaker federal protection in bankruptcy than ERISA plans; employer plans can offer better fiduciary oversight and institutional pricing.

Read our detailed guide on rollovers and consolidation to compare options (Rollovers and Consolidation: Moving Retirement Accounts Safely) (https://finhelp.io/glossary/rollovers-and-consolidation-moving-retirement-accounts-safely/).

You may also find the stepwise checklist in Rolling Over an Old Employer Plan helpful: https://finhelp.io/glossary/rolling-over-an-old-employer-plan-steps-to-avoid-tax-pitfalls/.

If you want a quick overview of your options when changing jobs, see Options for Rolling Over a Retirement Account After a Job Change (https://finhelp.io/glossary/options-for-rolling-over-a-retirement-account-after-a-job-change/).

Example scenarios with numbers

  • Indirect rollover gone wrong: Sarah’s $40,000 distribution had 20% ($8,000) withheld. She deposited $32,000 into a rollover IRA and missed replacing the $8,000 within 60 days. The IRS treated $8,000 as taxable income; if she was under 59½ she also faced a 10% penalty on that $8,000 (an additional $800). Plus, she lost the tax‑deferred growth on that $8,000.

  • Smart direct rollover: John requested a trustee‑to‑trustee transfer of $50,000 from his former employer plan to a traditional IRA. There was no withholding, the transfer completed in two weeks, and he continued investing without tax consequences.

When to get professional help

  • You have after‑tax contributions, employer stock, or a pension lump sum.
  • You’re considering a Roth conversion but don’t know the tax impact.
  • You face creditor, divorce, or bankruptcy risks where plan protections matter.

In my experience advising hundreds of clients, a short call with a fee‑only advisor or a certified financial planner often saves more than the cost of the consult by preventing a single rollover mistake.

Resources and authoritative references

Final checklist before you act

  • Choose the receiving account (new plan vs traditional IRA vs Roth conversion).
  • Prefer a direct trustee‑to‑trustee transfer whenever possible.
  • If you receive a check, ensure it’s payable to the receiving trustee; avoid depositing it to your account.
  • Keep copies of all transfer paperwork and watch for tax forms (1099‑R, 5498).

Professional disclaimer: This article is educational and not individualized tax or legal advice. Tax rules change and your situation may have nuances. Consult a tax professional or financial advisor for personalized guidance.

By taking the time to confirm plan rules, requesting trustee‑to‑trustee transfers, and understanding tax consequences, you can avoid common rollover mistakes and keep your retirement savings working for you.