Avoid This Costly 401(k) Rollover Mistake That Could Wreck Your Retirement Savings

When it comes to 401(k) retirement plans, there is one serious mistake many people make when they leave a job. It's when their previous employer makes out a check to their name for their 401(k) balance, making the employee responsible for transferring the funds themselves.

Here's why a lump sum distribution check can be so problematic for workers, the tax consequences it can bring, and what to do instead.

401(k) disclosures can be incredibly complicated

401(k) paperwork is notoriously hard to understand. This is especially true when people leave jobs, whether they are changing employers or getting laid off. Every time someone leaves a job, they receive something called a 402(f) notice.

This document explains the choices employees have when rolling over their 401(k). It's so challenging to understand that in November 2025, Representatives introduced a bipartisan bill called the Retirement Simplification and Clarity Act. If passed, the government will update the 402(f) notice to make it easier to understand.

The costliest mistake: taking a lump-sum distribution

The Government Accountability Office (GAO) found through its research that 82% of workers weren't aware of their 401(k) distribution options after leaving a job. Moreover, 38% reported not understanding the tax implications of their choices.

So, it's not surprising that many people choose an indirect rollover without understanding its potential consequences. An indirect rollover is when a previous employer issues a check for the employee's 401(k) plan that the employee can then deposit with their new employer. The check is made out to the employee's name, rather than to a new 401(k) account.

Why indirect rollovers can be an expensive mistake

The problem with getting a check made payable to you for a 401(k) rollover is that the IRS typically withholds 20% of your 401(k) amount for taxes. So, you'll typically be short when you go to deposit your full 401(k) amount. Moreover, you have only 60 calendar days to deposit the full amount, or you may be charged taxes and penalties.

The penalties come because if you're missing a portion of your 401(k) from your previous employer, it counts as an early withdrawal if you're below age 59 1/2.

An indirect rollover could also lead to a surprise tax bill

The most challenging problem with this is that many people might not even realize the penalties, fees, and taxes until months later, when tax day arrives. 

If you don't make the 60-day deadline and contribute the missing portion of your 401(k), not only could you get early withdrawal penalties, but the amount that's missing becomes taxed as ordinary income. That means your tax bill could be much higher than expected.

What to do instead of an indirect rollover

Instead of an indirect rollover, ask your company to send your 401(k) directly to your new employer. Alternatively, you can roll over your 401(k) into a self-directed IRA. If you roll your 401(k) directly into another account, you will not have the same penalties and tax consequences that you would if you received a check for your 401(k) made out to you.

If you're not sure how to roll over a 401(k) into an IRA, many brokerage firms can help you do so by walking you step-by-step through the process.

Beware of other common retirement account mistakes

If you successfully move your 401(k) to a new company or into an IRA, make sure to avoid another common retirement account mistake. That mistake is accidentally leaving your savings in cash rather than investing it. According to Vanguard, this mistake can cost people over $100,000 or more in investment gains.

Essentially, when you move your retirement funds, you need to take two steps. First, transfer your old retirement account to your new account. That's where it will be in cash. Next, choose funds to invest in. Many people complete the first step but don't realize they must complete the second to be invested in the market.

Consult financial professionals when changing jobs

Ultimately, if you decide to change jobs, make sure to consult a financial professional before doing so. An accountant and a financial planner can help make sure that you choose the best options for you when it comes to rolling over your old 401(k). 

Changing employers can be stressful, but making a mistake with your 401(k) funds can make your later years more difficult.

Bottom line

The goal for many American workers is to have a stress-free retirement one day. 

However, making a costly 401(k) rollover mistake can put your retirement future in jeopardy. That's why it's so important to read all disclosures when leaving a job and consult a professional if you need help making a decision.

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