Rolling over an old workplace retirement plan sounds simple enough. You leave a job, move the money, and keep saving for the future.
But there are a few sneaky pitfalls in the rollover process that can quietly cost you in taxes, missed growth, and even blown planning opportunities if you’re not careful. I see these mistakes all the time, so let’s break them down and make sure you don’t fall into any of these traps.
This one hurts. Many people correctly roll over their old 401(k) into an IRA, but once the transfer is complete, the money just sits there in cash.
This might happen because they assume it’s still invested, or they simply forget to pick new investments. Either way, uninvested cash isn’t working for you. It’s missing out on compounding returns, and inflation is quietly eating into its value.
Check your rollover. If it’s sitting in a money market fund or cash sweep account, it’s time to get that money back into a properly diversified portfolio aligned with your goals.
Sometimes people leave an old 401(k) behind and never touch it. Maybe they don’t know what to do with it. Maybe they forget it even exists.
Either way, this can be a problem. Over time, the account can become harder to track, service providers may change, and you may miss out on better investment options or lower fees elsewhere.
Old accounts deserve fresh attention. Whether you roll it into a new 401(k) or into an IRA, consolidating can simplify your financial life and keep everything moving in the right direction.
For high-income earners, rolling over into an IRA can actually create more problems than it solves.
If you’re planning to do a Backdoor Roth IRA conversion, having a pre-tax IRA balance can trigger the pro-rata rule, which makes your Roth conversion taxable (and complicated).
In most cases, you may be better off rolling the money into your new employer’s 401(k), which keeps your IRA balance clean and preserves your ability to use the Roth strategy down the line.
When you open a new IRA or retirement plan, your old beneficiary designations don’t carry over. If you don’t name new beneficiaries, your account could default to your estate, which may cause delays, legal fees, and unintended tax consequences for your loved ones.
This is a quick fix: always double-check your beneficiary designations after a rollover. You’ll thank yourself later.
If you request a rollover and the provider cuts the check to you personally, even if you intend to move it right into a new account, the IRS may treat it as a distribution.
Worse, they’ll likely withhold 20% for taxes, and if you don’t redeposit the full amount within 60 days, you may owe income tax and a penalty on the entire amount.
To avoid this mess, make sure your rollover is direct: the check should be payable to your new IRA or 401(k) provider, not to you.
Rolling over gives you a great chance to improve your investment setup. But not all IRAs and 401(k)s are created equal.
Before you roll over, compare fees, investment options, and service. Some IRAs have higher internal costs, while some employer plans may offer institutional share classes with lower fees.
Make sure the move helps, not hurts, your long-term plan.
Rollovers are a powerful tool, but only if done right. These mistakes are avoidable, but they happen all the time. If you’re unsure what the best move is, or how to align your rollover with the rest of your financial plan, let’s talk. Helping you avoid costly missteps is what I’m here for.
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