By Max Michalczik CFP® & Kekoa Pfau ChFC®

Changing jobs or entering retirement often brings an important financial decision: what to do with your 401(k). While a rollover can be straightforward, mistakes during the process can lead to unnecessary taxes, penalties, and lost long-term growth.

If you are navigating multiple retirement accounts, tax considerations, or evaluating a broader retirement income strategy, this decision should be coordinated carefully within your overall financial plan.

What Is a 401(k) Rollover?

A 401(k) rollover moves assets from an employer-sponsored retirement plan into another qualified retirement account. Most commonly, funds are rolled into an Individual Retirement Account (IRA)—either traditional or Roth, or a new employer’s 401(k) plan.

If you are considering converting part of your 401(k) to a Roth IRA during the rollover process, you may also want to review our article on Roth IRA conversions for additional tax-planning considerations.

A direct rollover, where funds move directly from one custodian to another, is generally the safest method. Indirect rollovers introduce additional tax risk and strict timing rules.

IRA vs. 401(k): Key Differences

Before initiating a rollover, it is important to evaluate whether moving assets is appropriate.

IRAs typically offer:

• Greater investment flexibility
• Broader access to ETFs and diversified portfolios
• Consolidation of multiple retirement accounts

401(k) plans may offer:

• Institutional pricing on certain funds
• Strong federal creditor protections
• Simplicity if remaining employed

Most Common 401(k) Rollover Mistakes

1. Unintentional Taxable Distributions

If funds are distributed directly to you instead of transferred custodian-to-custodian, mandatory federal withholding may apply. This can create unexpected taxable income if not redeposited properly.

2. Missing the 60-Day Rollover Window

With an indirect rollover, you must deposit funds into a qualified account within 60 days. Missing this deadline can result in the entire amount being treated as taxable income.

3. Cashing Out During Transitions

Cashing out a 401(k) often results in income tax, penalties, and the permanent loss of tax-deferred growth. To understand how long-term growth impacts retirement outcomes, you can use our Retirement Calculator to model different scenarios.

4. Ignoring Investment Alignment After the Rollover

Once assets are transferred, they should be allocated intentionally. If funds sit in cash or remain misaligned with your goals, long-term results may suffer.

Leaving a 401(k) With an Old Employer

In some cases, leaving assets in a former employer’s 401(k) may make sense – especially if fees are low or age-based withdrawal flexibility (such as the Rule of 55) applies.

However, if you are consolidating accounts for simplicity or tax planning, a rollover can provide improved oversight and coordination.  Another consideration is that you are not in full control of the account, as your former employer can make changes to the plan at any time. 

Tax Consequences of Getting It Wrong

Mistakes during a rollover can result in:

• • Immediate income taxation
• • Early withdrawal penalties
• • Loss of tax-deferred growth
• • Reduced retirement readiness

If your rollover decision coincides with higher income years, you may also want to evaluate whether partial Roth conversions make sense within your current tax bracket.

A Structured Approach to 401(k) Rollovers

A thoughtful rollover strategy considers tax positioning, retirement income timing, portfolio coordination, and long-term legacy objectives.

For many mid-career professionals, a rollover becomes a pivotal planning moment – not just an administrative task.

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This content is for educational and informational purposes only and should not be considered personalized investment, tax, or legal advice. The information provided is general in nature and may not apply to your individual circumstances. All investments involve risk, including the potential loss of principal.
The Freyr Group, LLC does not provide legal or tax advice. Any references to tax-related topics are provided for general informational purposes only, and individuals should consult with a qualified tax professional regarding their specific situation.
For additional information, please review our full disclosures.