Whenever you leave an employer for good, you often have a number of loose ends to address. And one of the most financially significant decisions is what to do with your 401(k) from your soon-to-be-former workplace.
When you leave a job where you had a 401(k), you have a few ways to handle that money. In some cases, you might roll the funds from your old employer’s 401(k) into your new employer’s 401(k). But in many other cases, you’ll roll over your 401(k) into your own personal account—specifically, a rollover individual retirement account (IRA).
Rollover IRAs have a number of benefits. They can keep your 401(k)’s tax advantage secure, they generally offer a wider variety of mutual funds to choose from, and they also typically allow you to invest in many other asset classes—individual stocks, individual bonds, exchange-traded funds (ETFs), and more—than you could ever touch in a 401(k).
Just make sure you don’t botch an IRA rollover.
Today, we’re going to introduce you to a few costly 401(k) rollover mistakes. The idea here is that by knowing what to look out for ahead of time, you can avoid these pitfalls and focus more on making the most of your newfound rollover IRA.
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Don’t Make These 401(k) Rollover Errors
Retirement saving isn’t just about making smart moves—it’s about avoiding unforced errors.
401(k) rollovers are relatively straightforward. But if you drop the ball, you’ll have suddenly made building up your nest egg much more difficult than it ever needed to be.
With that in mind: Here’s what not to do when you roll over your 401(k).
1. Forget to Deposit Your 401(k) Check Into Your IRA on Time
The easiest path for you is a direct rollover in which your 401(k) plan administrator directly delivers your funds to your new IRA.
However, there are two other paths that put the money directly into your hands (discussed next).
Rollover Method #1: Direct rollover with check payable to new account
In this instance, the plan administrator sends you a check that’s payable to the new rollover IRA. It becomes your responsibility to deposit it within 60 days. If you don’t, it will be considered a taxable distribution, and you will be liable for both taxes and a penalty on any undeposited money.
(Note: Those 59½ and older would only be responsible for taxes, but not a penalty, in this situation. The same would go for anyone who leaves their job during or after the year they turn 55; this is referred to as the “rule of 55.”)
Rollover Method #2: Indirect rollover
In this instance, the plan administrator pays you directly, likely with a check made out to you.
Similar to the first option, you have 60 days to deposit some or all of the money into your new IRA. However, in the event of an indirect rollover, your company will withhold taxes, so to complete a full rollover, you’ll have to contribute your own funds to make up for the missing amount.
If you failed to deposit your funds in a timely manner, you generally would have to pay any taxes still owed above what was withheld, plus a penalty. The caveats for people 59½ and older, as well as anyone covered by the rule of 55, apply here, too.
Note: Additional rules apply if Roth accounts are involved, whether you’re rolling over from a Roth 401(k), or rolling into a Roth IRA.
Related: What Is Medicare? A Guide to Types of Medicare Coverage
2. Not Investing Your 401(k) Money
401(k)s have enjoyed growing guardrails to ensure plan participants are actually putting their money to work. For instance, if you’re auto-enrolled in a 401(k) plan but don’t make an investment selection, your plan might funnel your contributions into a qualified default investment alternative (QDIA), which is effectively a default fund chosen from among the plan’s investment options.
The same can’t be said for IRAs.
At the most, any uninvested cash might be placed into a cash reserve account that invests in, say, a money market account. While the interest generated that way is better than nothing, your money would almost certainly have more growth potential invested in stocks, bonds, and various other vehicles you can access through a typical investment account.
In other words: It’s up to you to actually invest your money after you’ve rolled over 401(k) funds.
For the most part, failure to invest funds is an oversight rather than an active choice. A recent Vanguard survey asked rollover IRA account holders to provide one or more reasons why their funds had remained in cash, rather than invested. More than two-thirds (68%) said they didn’t realize how their assets were invested. Meanwhile, 48%% said they thought IRA contributions were automatically invested (they’re not). Only 35% said they preferred a cash-like investment.
How much growth are you missing out on by failing to invest your rollover funds? Vanguard estimates that for people under age 55, investing in a target-date fund (instead of keeping the money as cash after a rollover) could, on average, grow their money by more than $130,000 by age 65.
Related: What Is the Social Security COLA?
3. Falling Victim to Analysis Paralysis
OK. So you’ve rolled over your funds, and you know you need to invest that money.
Now what?
Listen. Many people don’t know how to invest for retirement. A 401(k) plan will usually at least keep things simple by only offering a handful of mutual funds with straightforward goals.
But most IRAs are going to allow you to select from among thousands of stocks, mutual funds, exchange-traded funds (ETFs), and other vehicles. And that, my friends, can lead to analysis paralysis—the inability to make a decision because you have too many options to choose from and you’re worried about making a mistake.
But the longer your money remains uninvested, the less time it has to grow.
If you can’t decide how to invest your money right away, you might want to start with a target-date fund that will provide some amount of diversification and adjust itself over time. Basic, broad-market index funds are another way to get your feet wet.
Alternatively, you could talk to a financial advisor to choose your investments. Knowing your investment choices are in the hands of an expert can give you peace of mind—and they’ll be well-equipped to put your money to work in quick order.
Related: 10 Worst 401(k) Money Mistakes to Avoid
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4. Investing Much Differently Than You Did in Your 401(k)
When you move your money from a 401(k) to an IRA, there’s nothing wrong with re-evaluating your investment strategy and making tweaks. After all, as mentioned before, IRAs generally have far more investment options than a 401(k).
But you also need to be responsible.
When new investment options are available to you, and you have a lot of money to put to work, it’s easy to start allocating funds like a kid in a candy store. A few shares of this high-risk biotech, a few thousand dollars in that cryptocurrency, a flier on a hyper-complex options ETF …
If your 401(k) strategy was generally working well, you should consider similar investments within your IRA. They should match your risk tolerance. You should remain roughly as diversified. And any changes are better left to the periphery.
Again, if you aren’t confident in your investing abilities, you may want to consider using a financial advisor.
Related: Is Your Retirement on Track? Here Are the Average 401(k) Balances By Age
5. Forgetting to Auto-Reinvest
Usually, a 401(k) plan administrator sets up accounts to automatically reinvest any dividends or interest earned without any action needed on your end.
But once you have your own rollover IRA, the responsibility falls to you.
Most IRA providers allow you to set up Dividend Reinvestment Plans (DRIP), which, as the name suggests, automatically reinvests dividends into whole or fractional shares of stocks, mutual funds, and other vehicles—and this maximizes the power of compound growth over time.
If you forget to set up a DRIP when you first purchase a stock or fund, don’t worry—you can typically go back and change those settings later.
Related: How to Invest HSA Funds [Level Up Your Retirement Savings]
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Tax Benefits of 401(k) Plans
Let’s go over a few basic facts about 401(k) plans and how your account is taxed.
A 401(k) plan is a retirement savings plan established by your employer. The employer-sponsored retirement accounts set up under a 401(k) plan can be either a traditional or Roth account, depending on what your company offers. Each type of 401(k) account has its own tax benefits.
The main difference between a traditional 401(k) account and a Roth 401(k) account is when funds in the account are taxed.
Money contributed to your traditional 401(k) account isn’t included in your taxable income for the year. So, you get a tax break right away. Funds in the account then grow on a tax-deferred basis (i.e., you don’t have to pay tax each year on any interest or earnings). However, you eventually have to pay income tax on any withdrawals from the account down the road.
With a Roth 401(k) account, contributions are included in your taxable income. As a result, you owe income tax on the amount you put in the account for the year the contribution is made. But after that, funds in the account grow on a tax-free basis and no income tax is due when you take money out of the account in retirement.
In addition, you might also qualify for a tax credit of up to $1,000 ($2,000 for married couples filing a joint tax return) for putting money into either a traditional or Roth 401(k) account. However, this credit—commonly called the Saver’s Credit—is only available to low- and moderate-income individuals. So, to claim the credit, your federal adjusted gross income must be at or below a certain amount, which is based on your filing status.
YATI Tip: Starting in 2024, required minimum distributions (RMDs) were no longer required for Roth 401(k) accounts.
Related: IRA Contribution Limits for 2025
Early Withdrawal Penalties
There are restrictions on when you can withdraw money from a 401(k) account, and a 10% early withdrawal penalty if you take money out of your account too soon.
With a traditional 401(k) account, you might have to pay the penalty if you withdraw money from the account before you turn 59½ years old. And, with a Roth 401(k) account, you could be hit with the penalty if you withdraw earnings before reaching 59½ years of age.
There are various exceptions to the early withdrawal penalty, though. For instance, you can withdraw funds from a 401(k) plan before you turn 59½ to pay certain medical expenses. You can also avoid the penalty if you lose or leave a job after the year you turn 55 and pull money out of that company’s 401(k) plan. Other exceptions might also apply.
Related: 12 States That Tax Social Security Benefits
401(k) Contribution Limits for 2024 and 2025
The inflation rate has been moderating, but the 401(k) contribution limit’s bump from 2024 to 2025 was the same as it was from 2023 to 2024.
For 2024, employees under 50 years old can contribute $23,000 to one or more 401(k) plans ($23,500 in 2025). That’s an increase of $500 from the $22,500 cap for 2023.
Workers who are at least 50 years old can put an additional $7,500 in their 401(k) plans for 2024—for a total of $30,500 ($31,000 in 2025). This extra amount is called a “catch-up” contribution, and it remains the same from 2024.
However, there is a change this year that improves catch-up contributions for some employees. Workers ages 60 to 63 actually enjoy a higher catch-up contribution limit of $11,250, for a total of $34,750.
Cap on Employer Contributions
As an extra benefit, some companies offer an employer match with their 401(k) plan. In other words, in addition to whatever you put in your 401(k) account, the company will also put money in your account.
However, there’s also a cap on the amount an employer can contribute to your 401(k).
For 2025, employers can contribute up to $47,500 of additional funds to an employee’s account, or a combined total of $71,000 in employee and employer contributions for workers under 50. (The combined total limit is $78,500 for employees age 50 or older who make catch-up contributions, and $82,250 for employees ages 60-63 who make catch-up contributions.)
By comparison, in 2024, for an employee under age 50, the maximum an employer can contribute is $46,000. That comes to a total employee-and-employer contribution limit of $69,000. (The 2024 combined total for workers making catch-up contributions is $76,500.)
Note, however, that an employer can’t put in more than a worker’s annual compensation from the company.
Related: How Much Should I Contribute to My 401(k)?
Related: 6 Best Stock Recommendation Services [Stock Picking + Tips]
Stock recommendation services are popular shortcuts that help millions of investors make educated decisions without having to spend hours of time doing research. But just like, say, a driving shortcut, the quality of stock recommendations can vary widely—and who you’re willing to listen to largely boils down to track record and trust.
The natural question, then, is “Which services are worth a shot?” We explore some of the best (and best-known) stock recommendation services.
Related: 12 Best Long-Term Stocks to Buy and Hold Forever
As even novice investors probably know, funds—whether they’re mutual funds or exchange-traded funds (ETFs)—are the simplest and easiest ways to invest in the stock market. But the best long-term stocks also offer many investors a way to stay “invested” intellectually—by following companies they believe in. They also provide investors with the potential for outperformance.
So if you’re looking for a starting point for your own portfolio, look no further. Check out our list of the best long-term stocks for buy-and-hold investors.
Related: 9 Best Monthly Dividend Stocks for Frequent, Regular Income
The vast majority of American dividend stocks pay regular, reliable payouts—and they do so at a more frequent clip (quarterly) than dividend stocks in most other countries (typically every six months or year).
Still, if you’ve ever thought to yourself, “it’d sure be nice to collect these dividends more often,” you don’t have to look far. While they’re not terribly common, American exchanges boast dozens of monthly dividend stocks.
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