7 Mistakes You’re Making When You Roll Over a 401k When Leaving Your Job (and How to Fix Them)

Changing jobs is a big deal. Whether you’re moving up the corporate ladder, switching industries, or finally taking that leap into retirement, there is a lot on your plate. Between the exit interviews and the new-hire paperwork, it’s incredibly easy to push your old retirement account to the back burner.

But here’s the thing: your 401(k) is likely one of your largest financial assets. Leaving it behind or handling it poorly can cost you thousands in taxes, penalties, and lost growth. In 2026, the 401k rollover rules have become even more specific, and navigating them requires a bit of a roadmap.

At Solomon Estate and Wealth Planning, we see folks make the same few mistakes over and over again. The good news? They are all totally avoidable. Let’s dive into the seven biggest mistakes people make when they roll over a 401k when leaving a job and, more importantly, how you can fix them.

1. Choosing an Indirect Rollover Instead of a Direct One

This is arguably the most common pitfall. When you tell your old HR department that you want to move your money, they might ask if you want the check sent to you. This is an "indirect rollover."

The Mistake: If the check is made out to you, the IRS requires your employer to withhold 20% for federal taxes immediately. Even if you plan to put the whole amount into a new IRA, you’re starting 20% in the hole.

The Fix: Always request a Direct Rollover. This is where the funds move directly from your old plan to your new IRA or 401(k) provider. The check should be made payable to the new financial institution "For the Benefit Of" (FBO) you. This way, no taxes are withheld, and the money stays fully invested.

If you want to see the different ways to handle this transition, check out our guide on leaving your job and why the 401(k) rollover matters.

2. Missing the 60-Day Deadline

If you do end up with an indirect rollover (the check is in your hands), the clock starts ticking the moment you receive those funds.

The Mistake: You have exactly 60 days to get that money into another qualified retirement account. If you miss that window: even by one day: the IRS considers the entire amount a taxable distribution. If you’re under age 59 ½, you’ll also get hit with a 10% early withdrawal penalty.

The Fix: Mark your calendar, set a phone alert, and do it immediately. Better yet, stick to the fix in Mistake #1 and use a direct rollover so the 60-day rule doesn't even apply to you. Keeping your savings protected is step one in any smart retirement savings strategy.

3. Forgetting to Replace the 20% Withholding

This is the "stealth" mistake that catches people during tax season. Let's say you have $100,000 in your 401(k). You do an indirect rollover, so the company sends you a check for $80,000 (after withholding $20,000 for taxes).

The Mistake: To avoid 401k rollover tax implications, you must deposit the full $100,000 into your new account within 60 days. That means you have to come up with $20,000 from your own personal savings to make the account whole. If you only deposit the $80,000 you received, the IRS treats that $20,000 difference as a withdrawal.

The Fix: If you can’t afford to bridge that 20% gap with your own cash, do not do an indirect rollover. A direct rollover avoids this entire headache because 100% of the funds move at once.

4. Rolling Into the Wrong Type of Account

Not all retirement accounts are created equal. You likely have "Pre-Tax" (Traditional) money in your 401(k), but you might also have "Post-Tax" (Roth) money.

The Mistake: Rolling your Traditional 401(k) into a Roth IRA without realizing it will trigger a massive tax bill. Since you’re moving money from a "never-been-taxed" bucket to an "already-taxed" bucket, the IRS wants their cut right now.

The Fix: Match your buckets. Move Traditional 401(k) funds to a Traditional IRA, and Roth 401(k) funds to a Roth IRA. If you are considering a conversion to an annuity for lifetime income, make sure you understand the differences between an annuity and an IRA rollover.

5. The "Zombie" IRA: Not Re-Investing the Money

You did it! You successfully moved the money to a new IRA. You see the balance on your screen and breathe a sigh of relief. But then, six months later, you realize your balance hasn't moved a cent.

The Mistake: Unlike your 401(k) where you might have had an "auto-invest" feature, money rolled into an IRA often sits in a "settlement fund" (basically a cash/savings account) until you manually choose your investments.

The Fix: Once the rollover is complete, you must select your new mutual funds, ETFs, or other investment vehicles. Don't let your hard-earned savings sit on the sidelines as "cash" while the market moves without you. If you're unsure where to put it, we often discuss why rolling over to an annuity is a popular move for those seeking safety and income.

6. Ignoring Hidden Fees and Rules

Your old 401(k) might have had very low institutional fees because your company had thousands of employees. Your new IRA provider might not be so generous.

The Mistake: Many people move their money to the first big-name bank they see without checking the expense ratios, management fees, or "custodial" fees. Over 20 or 30 years, an extra 1% in fees can strip six figures away from your final retirement nest egg.

The Fix: Shop around. Compare the costs of your old plan versus the new one. Sometimes, if your old plan was great, you might even consider leaving the money there (if the company allows it). For a deeper look at what to watch out for, our Solomon Financial Services insights can help you weigh your options.

7. Cashing Out Instead of Rolling Over

When you leave a job, that "cash-out" option on the form looks very tempting. Maybe you want to pay off some debt or buy a new car.

The Mistake: This is the most expensive way to access your money. Between the 20% mandatory federal withholding, state taxes, and the 10% early withdrawal penalty, you could lose nearly 40-50% of your account balance instantly. Plus, you lose out on years of compound interest.

The Fix: Treat your retirement fund as "untouchable." If you are in a true financial emergency, look at other options first. If you're nearing age 65, you should also be focusing on how your retirement planning and Medicare enrollment will work together, rather than depleting your savings now.

A Special Note for Early Retirees (The "Rule of 55")

If you are leaving your job between the ages of 55 and 59 ½, you might actually want to wait before rolling over. Under the "Rule of 55," if you leave your job in or after the year you turn 55, you may be able to take penalty-free withdrawals from your current 401(k). If you roll that money into an IRA, you generally lose that privilege and have to wait until 59 ½ to avoid the 10% penalty. This is why understanding the specific 401k rollover rules for your age group is so vital.

Ready to Master Your Wealth?

Rolling over your 401(k) is just one piece of the puzzle. If you want to build a retirement that is secure, predictable, and: most importantly: built on your terms, you need to look at the bigger picture.

I’ve put together a resource specifically for people who are tired of the "standard" advice and want to build real security. My e-book, "Wealth Without Walls," takes you through the strategies we use to help our clients protect their estates and plan for a future they actually enjoy.

Click here to grab your copy of Wealth Without Walls and start planning your future today!

Managing your money doesn't have to be a headache. By avoiding these seven common mistakes, you’re already ahead of the curve. If you have questions about your specific situation or want to talk about how a rollover fits into your overall estate plan, give us a shout! We're here to help you navigate the journey.

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