Mistakes Spokane Retirees Make When Rolling Over a 401(k) | Spokane Financial Advisor Guide
By Noah Schwab, CFP®, a Spokane Financial Advisor
Rollover of a 401(k) plan is a very simple process. You retire, move the money to an IRA, and then keep investing. However, as a Spokane Financial Advisor, I have seen that this is one of the most common mistakes that people make when they retire.
Rollover of a 401(k) plan is not just a paperwork process. It is a tax decision, an investment decision, a beneficiary decision, and sometimes an estate planning decision. A mistake can result in increased taxes, reduced flexibility, and unnecessary risk. Some of the most common mistakes that Spokane retirees make when they rollover a 401(k) are given below.
1. Making an Indirect Rollover Rather Than a Direct Transfer
The first, and perhaps most frequent, error is making the wrong choice between the two types of rollovers.
In an indirect rollover, the check is payable to you. The plan will withhold 20% for taxes, and you must contribute the full amount to an IRA within 60 days. If you don’t, the amount you didn’t contribute because of the withholding will be taxable.
In a direct rollover, you transfer the funds directly from the 401(k) plan to the IRA custodian. No taxes are withheld, and the 60-day deadline isn’t applicable. In almost all cases, a direct rollover is preferable. You can review the IRS rollover rules here.
2. Accidentally Creating a Large Tax Bill
Some retirees believe that all rollovers are tax-free. It is usually true, but not always.
- A rollover from a traditional 401(k) plan to a traditional IRA is tax-free.
- A rollover from a traditional 401(k) plan to a Roth IRA is a taxable event.
A Roth conversion can be a good strategy, especially in lower-income years. Learn more in Roth Conversion Strategies for Spokane Retirees. However, it should be done on purpose and planned out. Before converting, make sure you understand the tradeoffs discussed in Reasons Not to Do a Roth Conversion. Roth conversions should be aligned with:
- Your current tax bracket
- Future Required Minimum Distributions
- Medicare IRMAA thresholds
- Long-term estate planning goals
Without planning, a conversion can cause a significant spike in income taxes and even higher Medicare premiums. Higher income can also increase Medicare premiums, which I explain in IRMAA Explained by a Spokane Financial Advisor.
3. Not Coordinating the Rollover With RMD Rules
If you are already subject to Required Minimum Distributions, you must take your RMD before rolling over the remaining balance. The RMD cannot be rolled into an IRA.
This becomes especially important for retirees who plan to use Qualified Charitable Distributions. You cannot do a QCD directly from a 401(k). If charitable giving is part of your plan, review Understanding QCDs: The Ultimate Guide for Retirees. If you wait until RMD age to roll funds into an IRA, you may be required to take a taxable RMD first before accessing tax-efficient charitable giving. Proper timing matters. The IRS provides detailed guidance on Required Minimum Distributions here.
4. Overlooking Unique 401(k) Advantages
Many retirees assume an IRA is automatically better than a 401(k). Often that is true, but not always.
Some 401(k) plans offer valuable features such as:
- The age 55 penalty exception
- Institutional share class funds
- Strong creditor protection
Before rolling over your account, evaluate what you are giving up, not just what you are gaining.
5. Ignoring Beneficiary Designations
A rollover is the perfect time to review beneficiaries, yet many retirees do not. Beneficiary designations override your will. If they are outdated, your assets may pass differently than intended.
One mistake I frequently see is naming only a primary beneficiary, usually a spouse, without naming contingent beneficiaries such as children. In Washington State, retirement accounts are often central to estate planning. Rolling over a 401(k) without reviewing beneficiaries can undermine an otherwise thoughtful plan. For more on this, see Washington State Estate Taxes Explained: Strategies from a Spokane Financial Advisor.
6. Failing to Review Investment Risk After the Rollover
When funds move from a 401(k) to an IRA, the investment lineup changes completely. Inside an IRA, you often have far more options. That flexibility is powerful, but it requires discipline. I often see retirees:
- Heavily concentrated in large-cap technology stocks
- Too conservative out of fear
- Too aggressive for retirement income needs
This becomes even more important when coordinating withdrawals with Social Security and tax planning. If you have not already read it, When Not to Claim Social Security: A Spokane Advisor’s View explains how these decisions intersect. A rollover should trigger a comprehensive portfolio review aligned with retirement income goals.
7. Missing the Net Unrealized Appreciation Opportunity
If your 401(k) includes employer stock, you may qualify for Net Unrealized Appreciation. NUA can allow you to pay ordinary income tax only on the original cost basis, while the growth is taxed later at long-term capital gains rates.
Once employer stock is rolled into an IRA, the NUA opportunity is permanently lost. If company stock is involved, this decision should always be coordinated with your overall tax strategy.
8. Treating the Rollover as an Isolated Event
The biggest mistake is viewing a rollover as just an account transfer. Retirement is a major transition. A 401(k) rollover should be aligned with:
- Roth conversion planning
- Future RMD strategy
- Social Security timing
- Medicare IRMAA planning
- Charitable giving strategies
I also explain why tax diversification matters in Why Spokane Retirees Need Money in Different Tax Buckets, which directly impacts rollover strategy. When handled strategically, a rollover becomes an opportunity to optimize your entire retirement plan.
A Spokane Financial Advisor’s Final Thought
A 401(k) rollover is more than a money transfer. It is a tax, investment, estate, and retirement planning decision.
It can create flexibility and opportunity when done with care. It can create unnecessary tax expenses and lost opportunities when done casually. Sometimes the smartest move is not just rolling the account. It is rolling it over the right way.
If you are retiring or considering a rollover, working with a Spokane Financial Advisor who understands how rollovers fit into your broader retirement strategy can help you avoid costly mistakes.
Talk with our Spokane Financial Advisor team
About the Author
Noah Schwab, CFP® is a financial advisor in Spokane, Washington, helping retirees with $ 1M+ maximize their 401(k) with Roth conversions and tax strategies.
- No commissions or insurance
- Investment management, tax, and financial planning
Noah Schwab, CFP®, is a Spokane financial advisor specializing in helping retirees with tax-efficient retirement income strategies, Roth conversions, and estate planning. This article is for educational purposes only and should not be considered tax or legal advice.
