Mistake #1: Taking an Indirect Rollover Instead of a Direct Rollover
There are two ways to roll over a 401(k): a direct rollover, where the funds move directly from your old plan to your new IRA or employer plan, and an indirect rollover, where the check is made out to you and you deposit it yourself within 60 days.
The indirect rollover is a trap for the unwary. Your employer is required to withhold 20% for federal taxes on an indirect rollover — even if you intend to roll the full amount over. To avoid a taxable event, you must deposit the full original amount (including the withheld 20% from your own funds) within 60 days. Most people do not have that cash available, which means they end up with a taxable distribution and a potential 10% early withdrawal penalty if they are under 59½.
Always request a direct rollover. The funds go directly to your IRA — no withholding, no 60-day clock, no risk.
Mistake #2: Missing the 60-Day Deadline
If you do take an indirect rollover, the IRS gives you exactly 60 days to deposit the funds into a qualifying account. Miss that deadline and the entire distribution becomes taxable income — plus a 10% penalty if you are under 59½. The IRS grants very few exceptions to this rule, and "I forgot" is not one of them.
Mistake #3: Rolling Over Company Stock Without Considering NUA
If your 401(k) holds highly appreciated company stock, rolling it into an IRA may not be the optimal strategy. The Net Unrealized Appreciation (NUA) rule allows you to take a lump-sum distribution of company stock, pay ordinary income tax only on the original cost basis, and then pay the lower long-term capital gains rate on the appreciation when you eventually sell.
For Southeast Texas energy sector workers with significant company stock in their 401(k), the NUA strategy can result in substantial tax savings compared to a standard IRA rollover. This is a complex calculation that requires professional analysis before you make the rollover decision.
Mistake #4: Rolling Into the Wrong Type of Account
You can roll a Traditional 401(k) into a Traditional IRA (tax-free) or a Roth IRA (taxable conversion). Rolling into a Roth IRA is not a mistake per se — it can be an excellent strategy — but it needs to be intentional and planned. An accidental Roth conversion can create a large unexpected tax bill.
Similarly, rolling into a new employer's 401(k) versus an IRA has different implications for investment options, creditor protection, and future Roth conversion flexibility. The right destination depends on your specific situation.
Mistake #5: Cashing Out Instead of Rolling Over
Cashing out a 401(k) when leaving a job is almost always the worst financial decision available. You will owe ordinary income tax on the full amount plus a 10% early withdrawal penalty if you are under 59½. On a $100,000 balance, that can easily mean $30,000–$40,000 in taxes and penalties — permanently lost from your retirement savings.
Even if you are facing financial hardship, there are almost always better options than cashing out — including hardship withdrawals with reduced penalties, 401(k) loans, or other sources of emergency funds.
The Bottom Line
A 401(k) rollover is one of the most consequential financial transactions most people will ever make. Richard Placette II at MRB Capital Group helps Southeast Texas workers navigate 401(k) rollovers correctly — avoiding costly mistakes and positioning their savings for a tax-efficient retirement.