Do 401(k) Rollovers Really Count as Contributions? – Avoid This Mistake + FAQs

No – 401(k) rollovers are not treated as contributions under federal tax law. In other words, moving money from one retirement account to another doesn’t use up your annual contribution limits.

You’re not alone if you’ve wondered about this. Each year, roughly 10 million Americans roll over their 401(k) accounts – totaling around $1 trillion in assets – as they change jobs or retire.

In this article, you’ll learn:

• The critical difference between a 401(k) rollover and a regular contribution (and why the IRS treats them separately).
• How federal law and IRS regulations handle rollovers versus contributions, including exact rules and limits.
• What state-specific factors – from taxes to creditor protection – can affect your 401(k) rollover (and what stays the same everywhere).
• Real-world examples illustrating how rollovers work in practice, including special cases like Roth conversions.
• Expert tips to avoid common rollover mistakes that could inadvertently cost you in taxes, penalties, or lost benefits.

401(k) Rollovers vs. Contributions – Understanding the Key Difference

Many people use the terms “rollover” and “contribution” interchangeably, but they mean very different things in the world of retirement planning. Knowing the difference is crucial, because it affects your tax benefits and legal limits.

What Is a 401(k) Rollover?

A 401(k) rollover is the process of moving money from one retirement account to another. Typically, it happens when you leave a job and decide to transfer your old 401(k) balance into a new account – for example, into an Individual Retirement Account (IRA) or your new employer’s 401(k) plan.

Rollovers can be direct (money goes straight from your old plan to the new plan) or indirect (you receive the funds and then deposit them into the new account within 60 days). Either way, the essence of a rollover is that it’s existing retirement money changing accounts, not new money being added from your paycheck.

Key features of a rollover:

• It doesn’t increase your overall retirement savings immediately – it simply moves your money from one place to another.
• When done correctly (especially as a direct trustee-to-trustee transfer), it’s not a taxable event. Your funds remain in a tax-advantaged environment without penalty.
• If you roll over a pre-tax 401(k) into a traditional IRA or 401(k), you keep the tax-deferred status. If you roll over a Roth 401(k) into a Roth IRA, you keep the tax-free growth status. (Rolling pre-tax funds into a Roth account is allowed too, but that triggers taxes – we’ll cover that special case later.)
• Importantly, a rollover is labeled as a “rollover contribution” by the receiving plan, but it’s a special kind of contribution that comes from other retirement funds, as opposed to fresh income.

In short, a rollover is like transferring your retirement nest egg from one basket to another. You’re not laying a new egg; you’re just moving an existing one.

What Counts as a Contribution?

A contribution to a retirement plan means fresh money you put into the account, usually from your earnings or savings. For a 401(k), this often means a portion of your paycheck that you (and possibly your employer, via matching) deposit into your 401(k) each pay period.

For an IRA, it’s the amount of new money you deposit into the IRA during the year, up to the annual limit.

Key features of a contribution:

• Contributions increase the total balance of your retirement savings with new funds. For example, contributing $500 per month to your 401(k) adds new money to that account.
• The IRS sets annual contribution limits on how much new money you can put into these accounts. (For instance, as of 2024, you can contribute up to $23,000 per year to a 401(k) if you’re under 50, or $30,500 if 50 or older. IRAs have a separate limit – $7,000 per year in 2024 if under 50, with an extra $1,000 catch-up for 50+.)
• Contributions often come with tax benefits: traditional 401(k) and traditional IRA contributions are usually tax-deductible or made pre-tax (reducing your taxable income), while Roth 401(k) or Roth IRA contributions are made after-tax (no immediate deduction, but future withdrawals are tax-free).
• Your employer might match a portion of your 401(k) contributions, effectively boosting your savings. However, employers do not match rollovers – since a rollover isn’t new money you earned at that job, it’s just a transfer of existing savings.

In essence, a contribution is new money going in, subject to limits and potentially eligible for tax breaks and employer matches.

Contributions vs. Rollovers: Side-by-Side Comparison

To make the distinction crystal clear, here’s a quick comparison of contributions and rollovers:

As you can see, a rollover functions very differently from a new contribution. Now let’s dive deeper into what the law says about how rollovers are treated, especially in relation to those contribution limits everyone worries about.

Federal Law & IRS Rules: Do Rollovers Count as Contributions?

Under U.S. federal law, retirement plans like 401(k)s and IRAs are governed by the Internal Revenue Code and IRS regulations. These rules draw a clear line between rollover funds and regular contributions. Here, we’ll explore exactly what the IRS allows (and doesn’t allow), so you can see why that rollover won’t eat into your contribution room.

IRS Contribution Limits and How They Work

The IRS imposes strict contribution limits to retirement accounts each year. These limits are in place to prevent wealthy individuals from sheltering unlimited income in tax-advantaged accounts and to maintain fairness in the tax system. Key limits (as of the mid-2020s) include:

• 401(k) Elective Deferral Limit: This is the cap on what an employee can contribute from salary to a 401(k) plan each year. It’s adjusted for inflation most years. For example, the limit is $23,000 for 2024 (up from $22,500 in 2023) if you’re under age 50. Individuals 50 or above get an extra catch-up amount (making their limit $30,500 in 2024, up from $30,000 in 2023).
• IRA Contribution Limit: For IRAs (including traditional and Roth combined), the limit is lower. In 2024 it’s $7,000 per year if you’re under 50, or $8,000 if 50 or older. (In 2023 it was $6,500/$7,500; the limit tends to increase slowly over time.)
• Aggregate 401(k) Limit (Employer + Employee): Aside from what you put in, there’s also a limit on total contributions to your 401(k) plan in a year including employer contributions. For 2024, this “annual additions” limit is $69,000 (or $75,000 for 50+ if including catch-up). This cap covers your contributions, employer match, and any after-tax contributions in the plan.

These limits apply to new contributions – that is, fresh money going into the accounts in a given calendar year. If you exceed these limits with contributions, you typically have to remove the excess (with penalties and earnings adjustments) to avoid tax issues.

Now, crucially:

Rollovers are excluded from these contribution limits. The IRS does not count rollover amounts toward the annual caps listed above. Why? Because rollover money isn’t new contribution income; it’s already in the retirement system. Therefore, allowing rollovers doesn’t undermine the purpose of the limits.

In fact, IRS publications explicitly state that rollover contributions don’t count toward your annual contribution limit. For example, the IRS’s IRA rules mention that the standard contribution limit “does not apply to rollover contributions.”

The same concept carries over to 401(k)s and other qualified plans: you can move as much as you want from one 401(k) to another or into an IRA, and it’s not considered part of your yearly contribution quota.

What this means for you: if you have $100,000 in an old 401(k) and you roll it into an IRA this year, that $100,000 rollover won’t interfere with your ability to contribute new money to your IRA or 401(k). You could still contribute up to the full limit in fresh dollars to those accounts, assuming you’re otherwise eligible.

Why Rollovers Don’t Count: The IRS Rationale

From a legal perspective, a rollover is categorized differently than a contribution. The Internal Revenue Code has specific sections (like Section 402(c) for 401(k) plans and 408(d)(3) for IRAs) that govern rollovers.

These sections basically say that if you follow the rollover rules (such as the 60-day completion for indirect rollovers, etc.), the moved money is not treated as taxable income and is not subject to the contribution limits.

Think of it this way: the IRS views a rollover as a continuation of your tax-deferred (or Roth) retirement savings, not as a new deposit. The money was already counted once when you originally contributed it to a retirement account.

They won’t count it a second time just because you moved it to a new account.

There’s also a practical reason: many people accumulate large 401(k) balances over years of work. When they change jobs or retire, it’s common to consolidate those funds into an IRA or a new employer’s plan.

If rollovers were counted as contributions, hardly anyone could roll over their 401(k) without blowing past the annual limits (imagine trying to roll $50,000 from a 401k with an annual IRA cap of ~$7,000 – it wouldn’t be allowed!). Clearly, that wouldn’t make sense, which is why the law specifically exempts rollovers from contribution caps.

Tax Implications: Rollover vs. Contribution

One of the reasons people ask whether a rollover counts as a contribution is concern about taxes. Let’s break down how taxes differ between making a new contribution and doing a rollover:

• Taxes on Contributions:
  • Traditional 401(k)/IRA contributions are generally made with pre-tax dollars or are tax-deductible. This means contributing can lower your taxable income for the year. You don’t pay tax on those contributions (or their investment earnings) until you withdraw in retirement.
  • Roth 401(k)/IRA contributions are made with after-tax dollars. There’s no immediate tax break, but qualified withdrawals down the road are tax-free.
  • Either way, contributions themselves don’t generate a tax bill when you put the money in (aside from the fact that Roth contributions use post-tax money).
• Taxes on Rollovers:
  • Direct rollover of traditional funds (401k to IRA, or 401k to 401k): No income tax is triggered at the time of rollover. The IRS essentially ignores the transaction for tax purposes (though it’s reported). Your money continues to be tax-deferred.
  • Direct rollover of Roth funds (Roth 401k to Roth IRA): Also not taxable at rollover time, since it remains in Roth status. It’s just moving from one Roth account to another.
  • Rollover from traditional to Roth (a Roth conversion): This is the one time a rollover does trigger tax. If you take money from a pre-tax account and roll it into a Roth account, you must include that amount in your taxable income for the year. It’s treated as if you withdrew it (though penalty-free if done as a rollover) and then contributed to a Roth. You’ll owe ordinary income tax on the converted amount. This is often done strategically (people convert to Roth to get tax-free growth later), but it’s not a “contribution” in the sense of counting toward a limit; it’s classified as a rollover conversion. Important: even though you pay tax on a Roth conversion rollover, the amount converted does not reduce how much you can still contribute to an IRA or 401k. For example, you could convert $50,000 from a 401(k) to a Roth IRA this year (and pay taxes on that $50k), and still put in a separate $7,000 Roth IRA contribution if you’re eligible by income, because the $50k was a rollover, not a contribution.
  • Indirect rollover (60-day rollover): If you get a check from your 401(k) and intend to roll it over yourself, no tax is owed if you successfully deposit it into a qualified account within 60 days. However, your old plan is required to withhold 20% for federal taxes on the distribution. That withheld amount can be refunded when you do your taxes, but only if you complete the rollover by making up that 20% out of pocket into the new account. (More on this in the mistakes section.) If you miss the 60-day window, the IRS treats the distribution as a withdrawal – you’ll owe income tax on it, and possibly a 10% early withdrawal penalty if you’re under 59½. Once taxed like that, you can’t retroactively call it a rollover.

In summary, a properly executed rollover typically has no tax impact at the time of the move, whereas contributions may give you a tax deduction or use after-tax dollars. And a rollover never counts against your contribution limits for the year, whereas contributions obviously do.

Special Case: Roth 401(k) Rollovers vs. Roth Contributions

It’s worth highlighting the Roth scenario because it’s a common point of confusion:

If you have a Roth 401(k) (after-tax contributions in your employer plan) and you leave your job, you might roll that Roth 401(k) into a Roth IRA. People often ask, “Does that rollover count as part of my Roth IRA contribution for the year?”

The answer is no – it doesn’t. You could roll over, say, $20,000 from a Roth 401(k) to a Roth IRA, and it would not interfere with the $7,000 (or whatever your limit) you could still personally contribute to a Roth IRA for that year.

This is logical when you think about it: that $20,000 in your Roth 401(k) was built up from contributions in past years (and maybe employer match, though match would have been in the traditional portion typically).

You already paid tax on those Roth 401(k) contributions when you originally earned the money. So moving it to a Roth IRA is just keeping it in the Roth family, so to speak. The IRS doesn’t penalize you for that move by counting it as a new contribution.

Another Roth-related nuance: after-tax 401(k) contributions and the mega-backdoor Roth. Some 401(k) plans allow employees to contribute after-tax money beyond the normal deferral limit (up to the overall $69k limit). These after-tax contributions (not to be confused with Roth 401k; these are a third category in some plans) can then be rolled over to a Roth IRA or Roth 401k.

This strategy, known as the “mega backdoor Roth,” effectively allows some people to put tens of thousands of dollars into a Roth IRA via rollover. Those rollover amounts are far above the normal $7k Roth IRA contribution limit.

And again – completely legal because the IRS treats it as rollover of qualified funds, not as an annual Roth contribution. It’s a prime example of how rollover rules let you circumvent the usual contribution caps in a perfectly allowed way.

How Many Rollovers Can You Do? (Frequency Limits)

While dollar amounts of rollovers aren’t capped by contribution limits, the IRS does have rules on how frequently you can perform certain rollovers:

• 401(k) to IRA or 401(k) to another 401(k): There’s generally no strict numerical limit on these. You could change jobs multiple times and roll each 401(k) into your IRA or new plan every time. You could even do multiple 401(k) rollovers in one year if you had reason to (though most people don’t have that many job changes in a year!). The key is that each distribution you want to rollover must individually meet the rollover criteria (e.g., not be an RMD or other ineligible payout, and be completed in 60 days if it’s not direct).
• IRA to IRA (60-day) rollovers: Here is where a strict rule applies. You are allowed one tax-free IRA-to-IRA rollover in any 12-month period (not a calendar year, but a rolling 12 months), regardless of how many IRA accounts you have. This rule came into harsh light due to a 2014 tax court case (Bobrow v. Commissioner), which clarified that even if you have multiple IRAs, you can’t do more than one 60-day rollover across all of them in a year. Before that, some taxpayers assumed they could do one per IRA account; the court and IRS said no, it’s one per person total. If you violate this rule and attempt a second IRA 60-day rollover within a year, that second rollover will be disallowed – meaning it becomes a fully taxable withdrawal (and if you put the money into another IRA, it’s treated as an excess contribution that you have to remove). This can lead to penalties and headaches.
• Direct transfers between IRAs: It’s important to note that the one-per-year limit doesn’t apply to direct transfers between IRA custodians or to rollovers from 401(k) to IRA. It specifically applies to situations where you take possession of the funds (the 60-day rollover). So, if you want to move IRA money around more frequently, you can do trustee-to-trustee direct transfers any number of times without issue. Likewise, as mentioned, you can do unlimited direct rollovers from different 401(k)s to an IRA.
• Roth conversions: Converting portions of a traditional IRA to Roth (which is a type of rollover from traditional to Roth) can be done multiple times, and isn’t limited by the one-rollover-per-year rule because those conversions are considered a different category (plus, they’re taxable events). You wouldn’t typically do frequent conversions unless part of a plan, but there’s no one-per-year limit on Roth conversions.

In summary, you can perform multiple rollovers, but if you’re moving money out of an IRA by yourself, stick to one per year or use direct transfers to avoid running afoul of IRS rules. This frequency rule is separate from contribution limits, but it’s an important rollover regulation to be aware of.

Other Federal Rules and Protections

A few other federal law points regarding rollovers:

• Eligibility of funds: Not every distribution from a plan can be rolled over. For instance, required minimum distributions (RMDs) from a 401(k) or IRA (once you’re past the required age) cannot be rolled into another plan – they have to be taken as cash. Similarly, certain periodic payments or hardship withdrawals can’t be rolled over. These restrictions ensure people don’t misuse rollovers to avoid taking mandated taxable distributions.
• Deadlines: The 60-day rule is key – from the day you receive a distribution that you intend to roll over, you have 60 days to deposit it into another eligible retirement account to qualify as a rollover. If you miss that, it’s generally too late (though the IRS can grant waivers for very specific hardships or emergencies).
• Reporting: When you do a rollover, it will be reported on tax forms. The plan or IRA you took money from will issue a Form 1099-R showing a distribution, and if it was a direct rollover it will usually have a code (like Code G in box 7 of the 1099-R) indicating it was a direct rollover to a qualified plan, meaning it’s not taxable. The new IRA that received the rollover will report it on Form 5498 as a rollover contribution. These are mainly for the IRS’s records; as long as you did everything right, you won’t pay tax on it, but you still need to report the rollover on your tax return (usually by noting that a distribution was rolled over, so it’s excluded from taxable income).
• No Double Dipping on Deductions: Occasionally, someone wonders if rolling money into an IRA can give them a tax deduction as if they contributed that money. The answer is no. You cannot deduct a rollover as an IRA contribution – it’s not counted as a contribution precisely so that you don’t get an extra deduction. The deduction benefit was either already taken when you first contributed those funds, or not applicable (if Roth). So don’t try to claim a tax deduction for a rollover deposit; the IRS will disallow it.

At the federal level, the bottom line is clear: rollovers are a separate bucket from contributions. You don’t lose any contribution opportunity by doing rollovers, and you should never be taxed (except in the case of Roth conversions) if you follow the rollover rules.

Now that we’ve covered federal treatment, let’s consider whether your state has any twist on these rules.

State Nuances: Do States Treat 401(k) Rollovers Differently?

Retirement accounts are primarily governed by federal law, but that doesn’t mean your state is completely irrelevant. States can have their own tax rules and protections that apply to retirement money. The good news is that when it comes to the fundamental question – do rollovers count as contributions? – state laws generally follow the federal lead. However, there are a few state-level nuances worth knowing:

State Tax Treatment of Rollovers

For income tax purposes, most states piggyback on the federal definition of taxable income. This means if the IRS considers your rollover nontaxable, your state will also treat it as nontaxable in most cases. A direct rollover won’t be counted as income on your state tax return, just as it isn’t on your federal return.

However, there are some considerations:

• State Tax Withholding: If you do an indirect rollover (taking a distribution check), your employer is mandated to withhold 20% for federal taxes. Many states also require a portion to be withheld for state income tax if you receive a retirement plan payout. For example, your state might withhold, say, 5% or 10% as a default. If you complete the rollover, you’ll get that state withholding back when you file your tax return (as a refund or credit against taxes due). But in the short term, it means you need to come up with that withheld amount from other funds to successfully roll over the full amount. Always check your state’s rules or ask the plan administrator if state withholding will apply on a distribution that you intend to roll over.
• State Income Tax Differences: A few states have quirks in their tax codes. For instance, Pennsylvania does not tax retirement income (including distributions) for residents above a certain age. But for rollovers, since they aren’t taxed federally, they generally wouldn’t be taxed by the state either way. Just be aware if you live in a state with no income tax, this is moot (there’s no state tax anyway), and if you live in a state with income tax, a properly executed rollover shouldn’t create state taxable income.
• After-Tax Contributions Basis: In some cases, people have after-tax contributions in a 401(k). Federally, when you roll those to an IRA, that after-tax portion carries over as “basis” (non-taxable when withdrawn). Most states will mirror this, but a few might have different ways of tracking after-tax basis (for example, New Jersey historically taxed 401(k) contributions, meaning some NJ residents have basis in their 401k that’s treated differently for state tax). If you’re in such a state, rolling into an IRA doesn’t count as a contribution, but you’ll want to keep records of after-tax amounts for state purposes too.
• State Tax Credits/Deductions: Some states offer a tax break for contributions to IRAs or retirement plans for lower-income households or such. A rollover wouldn’t qualify for those because it’s not a new contribution. This isn’t a “taxing” issue but a missed credit if someone thought moving money might get them a state credit – it won’t.

In summary, states generally do not tax rollovers (consistent with federal), but if you handle a rollover indirectly, be mindful of state withholding and reconciling that on your tax return.

Creditor Protection and Legal Differences

One area outside of taxation where state nuances come in is creditor protection and legal treatment of accounts:

• 401(k) Protection (ERISA): Funds in a 401(k) plan are usually protected by a federal law called ERISA. This means creditors (outside of a few exceptions like IRS liens or divorce settlements via QDROs) cannot touch your 401(k) assets, even if you go bankrupt. When you roll a 401(k) into an IRA, ERISA no longer governs those funds. Instead, they fall under state laws (and federal bankruptcy law) for protection. Under federal bankruptcy law, IRA assets that came from rollovers have a protection cap (currently over $1 million, and it can be increased by a judge for justice/equity reasons). Many states fully protect IRA assets from creditors, but some states have limits or certain exceptions.
  For example, California offers limited protection to IRAs (they’re protected only to the extent the court deems necessary for your support), whereas Florida shields IRAs almost completely from creditors. If you live in a state with less robust IRA protection, rolling over a 401(k) might slightly reduce the legal shield on those assets. This has nothing to do with contribution limits, but it’s a consideration in the decision to roll over.
• State Mandated Benefits: Some states have community property laws that might affect how retirement assets are treated in divorce. 401(k)s are subject to federal rules requiring spousal consent in some cases or a QDRO (Qualified Domestic Relations Order) for division.
• IRAs don’t require spousal consent to name a non-spouse beneficiary. When you roll over, you move from one legal regime to another. It doesn’t change how contributions are counted, but it can change spousal rights or beneficiary nuances.
• Unclaimed Property Rules: If you leave a 401(k) at an old job and lose touch, eventually that account could end up as unclaimed property under state law. Rolling it to an IRA you control can be a way to avoid that. Not directly related to counting as contributions, but it’s a reason some people roll over – to keep track of their money.

In short, when considering state issues: focus on tax withholding and asset protection. The fundamental nature of a rollover not counting as a contribution holds true universally, but the implications of moving money (like how safe it is from creditors or what paperwork is needed for taxes) can vary.

Most readers’ primary concern is taxes and contribution limits, and on that front, state differences are minimal – a rollover done right remains nontaxable and doesn’t affect your ability to contribute new money, no matter where you live.

Real-World Examples: How Rollovers and Contributions Play Out

All the rules and definitions can get abstract, so let’s look at a few simplified scenarios to illustrate how a 401(k) rollover interacts (or rather, doesn’t interact) with contribution limits and taxes:

Example 1: 401(k) to IRA Rollover in Same Year as IRA Contribution
Jane leaves her job and rolls over $50,000 from her 401(k) into a traditional IRA. Later that year, she contributes $6,500 of new money to that same traditional IRA (assuming that’s the IRA limit for the year). Is this allowed?

Yes. The $50,000 rollover doesn’t count toward the $6,500 IRA contribution limit at all. Jane just has to report the rollover on her tax return as a nontaxable rollover. She can still deduct the $6,500 traditional IRA contribution (if she qualifies based on income and participation in a workplace plan) or contribute it as a Roth IRA if eligible.

At year-end, her IRA provider will send her a Form 5498 showing both a $50,000 rollover and a $6,500 contribution – distinct boxes on the form.

Example 2: Roth 401(k) to Roth IRA Rollover and Roth IRA Contribution

Susan has a Roth 401(k) with $10,000 in it when she switches jobs. She rolls the entire $10,000 into her personal Roth IRA. Separately, she also wants to max out her Roth IRA contribution for the year with new savings. Can she?

Absolutely. The $10,000 rollover to the Roth IRA does not count toward the $7,000 annual Roth IRA contribution limit (for someone over 50, for example). She can still contribute her full allowed amount to the Roth IRA. When Susan does her taxes, the $10k rollover isn’t taxable income and isn’t a contribution – it’s just reported as a rollover.

Note: Since the money was already Roth, she doesn’t owe any tax on the rollover, and the rolled funds will continue growing tax-free in the Roth IRA.

Example 3: Rollover as a Roth Conversion (Traditional 401k to Roth IRA)
Alex decides to roll over his traditional 401(k) from an old employer to his Roth IRA to take advantage of Roth growth. His 401(k) is $20,000. He does a direct rollover to his Roth IRA (often called a conversion). Come tax time, Alex will have to report that $20,000 as additional income, because he moved pre-tax money into a post-tax Roth.

He might owe, say, $4,400 in federal tax (22%) on it (plus state tax if applicable). However, Alex also wants to contribute to his Roth IRA separately. Is he allowed? Yes – the $20k conversion didn’t use up his contribution limit. If he’s eligible by income, he could still contribute up to the full $6,500 (or $7,500 if catch-up applies) into the Roth IRA as a normal contribution that year.

The rollover conversion is treated separately. Essentially, Alex ends up with $20k (now after-tax) plus whatever new contributions he made, all in his Roth IRA.

These examples make clear that rollovers themselves never count against your contributions. As long as you follow the rollover rules, you maintain full freedom to make new contributions within the normal limits.

Pros and Cons of Rolling Over Your 401(k)

Since rollovers don’t count as contributions, they’re generally an attractive option when you move jobs or retire. But whether you should roll over an old 401(k) into an IRA or new plan involves other factors beyond contribution limits.

Here’s a quick look at the advantages and disadvantages of doing a rollover:

The pros and cons above assume you are eligible to roll over (e.g., you’ve left the employer or are allowed an in-service rollover at 59½). If you have a small 401(k) balance, some might choose to leave it or cash it out, but typically rolling it to an IRA is advised to preserve it for retirement (and as we emphasized, it won’t hurt your contribution limits).

The decision to roll over should factor in all these considerations. The contribution limit aspect is usually a non-issue since, as we know, the rollover won’t count against you. So the decision comes down to convenience, costs, investment options, and legal protections.

Avoid These Common 401(k) Rollover Mistakes

While the process of rolling over and the rules around it are well-established, people still run into pitfalls. Here are some common mistakes to avoid:

• Assuming a Rollover = New Contribution: Don’t mistakenly think that moving funds via a rollover gives you a tax deduction or counts as your yearly contribution. It doesn’t. Some people under-contribute to their accounts in a rollover year because they wrongly believe they’ve “maxed out” by rolling over a large sum. In reality, if you only rolled money over, you haven’t contributed any new money that year – so you might be able to contribute more if you want (and have the income to do so).
• Not Using Direct Rollovers: One of the biggest mistakes is taking a distribution check made out to you personally instead of doing a direct rollover (where the check is made out to the new institution, or an electronic transfer goes directly). A direct rollover bypasses the mandatory 20% withholding and the risk of missing deadlines. Always opt for “direct rollover” or “trustee-to-trustee transfer” when available. Only do an indirect rollover if you have no other choice or a specific reason – and if so, be diligent about the 60-day rule.
• Missing the 60-Day Deadline: If you do end up with a check in hand, mark your calendar and get those funds into a new retirement account pronto. The 60-day window is a hard deadline in most cases. Missing it generally means the entire amount becomes a taxable distribution (and possibly penalized). While the IRS can grant extensions for hardship or error (and they have self-certification for certain reasonable mistakes), you don’t want to rely on that if you can avoid it.
• Rolling Over Ineligible Money: Be careful not to attempt to roll over money that isn’t allowed. For example, if you are over 73 (the RMD age as of 2023) and you receive your required minimum distribution for the year, you cannot roll that RMD into an IRA – it’s not eligible by law. Similarly, if you took a hardship withdrawal from a 401(k), that money usually can’t be rolled over. Or if you’ve already done one 60-day IRA rollover in the past 12 months, don’t try to do another from a different IRA – that second one won’t be allowed. Always verify that the distribution is rollover-eligible.
• Not Considering Withholding and Replacement Funds: In cases where a direct rollover isn’t possible and you must do an indirect rollover, remember that any amount withheld for taxes needs to be replaced from your other savings to avoid it being treated as a partial withdrawal. People sometimes deposit only the net amount they received, which makes the withheld portion taxable. For example, from a $10,000 distribution with $2,000 withheld, you must still roll $10,000 into the new account (which means adding that $2,000 from elsewhere) to defer the entire amount.
• Combining after-tax and pre-tax improperly: If you have after-tax money in a 401(k) and you roll everything into a traditional IRA, you’ll end up mixing taxed and untaxed funds. This isn’t a disaster, but it can complicate future withdrawals (you’ll have to prorate taxes). A better strategy often is to split the rollover: send the after-tax portion to a Roth IRA (tax-free, since those contributions were already taxed) and the pre-tax portion to a traditional IRA. This way, you keep clean separation. The IRS now allows direct split rollovers like this. A mistake some make is not doing this and losing the chance to get that after-tax money into a Roth.
• Thinking you can’t contribute to a “rollover IRA”: Some people open a “Rollover IRA” to receive their 401(k) money and then think that account is somehow special or separate from a normal IRA – maybe even believing they aren’t allowed to make new contributions to it.
• In fact, a rollover IRA is just a traditional IRA. You can contribute new money to it (subject to the normal IRA limits and rules) or even combine it with other IRAs. There’s no legal distinction that prevents further contributions. (One consideration: if you plan to roll that IRA into a new employer’s 401(k) later, some employers prefer the IRA contain only rollover funds.
• But that’s a plan policy, not an IRS rule. In any case, don’t leave contribution room unused because you thought your rollover IRA was off-limits for new contributions.)
• Ignoring the impact on backdoor Roth attempts: If you’re doing a backdoor Roth IRA strategy (contributing non-deductible to a traditional IRA and then converting to Roth), having a large rollover traditional IRA can complicate things due to the pro-rata rule for conversions. This isn’t exactly a rollover mistake – the rollover is fine – but it’s a planning point.
• Some individuals inadvertently make their backdoor Roth more taxable by rolling over a big 401(k) to an IRA (which then makes a portion of their conversion taxable). If you intend to do backdoor Roths regularly and you have a new 401(k) plan available, you might choose to roll your old 401(k) into the new 401(k) instead of an IRA, to keep your traditional IRA balances low. The mistake would be not considering this before rolling into an IRA.
• Cashing Out Instead of Rolling Over: The ultimate mistake relative to rollovers is to not do one at all – i.e., cash out your 401(k) when switching jobs, pay a bunch of taxes and penalties, and lose that chunk of your retirement security. It can be tempting if you see a lump sum, but the long-term cost is huge, and you’d be eating into funds that could grow for your future. Rollovers preserve your retirement money for the future and avoid unnecessary tax hits.

Avoiding these mistakes will help ensure your rollover goes smoothly and serves its purpose – maintaining your retirement savings momentum without tax friction.

FAQs

Q: Do 401(k) rollovers count toward my IRA contribution limit?
A: No. Rollover amounts are excluded from IRA contribution limits. You can roll over any amount into an IRA, and it won’t reduce the dollar amount you can contribute new to that IRA in a year.

Q: Does a rollover into my 401(k) at a new job count as part of that year’s 401(k) contributions?
A: No. Rollovers into your new employer’s 401(k) do not count against the annual elective deferral limit. They are treated separately, so you can still contribute up to the normal limit from your salary.

Q: Are rollovers taxable events?
A: Not usually. Direct rollovers from one retirement account to another are tax-free. The only time you pay taxes on a rollover is if you change the tax status (like rolling over a traditional account into a Roth account, which triggers income tax on the amount).

Q: How often can I roll over my retirement accounts?
A: There’s no annual limit on direct rollovers between different plans. However, you can only do one indirect (60-day) rollover between IRAs per 12-month period. Direct trustee-to-trustee transfers and rollovers from 401(k)s don’t have that one-per-year restriction.

Q: Can I roll over a Roth 401(k) to a traditional IRA?
A: No. Roth 401(k) money can only be rolled into another Roth account (like a Roth IRA or Roth 401k). You cannot roll Roth funds into a traditional IRA without converting them (and paying tax). Pre-tax and Roth money must stay in their respective lanes during rollovers.

Q: If I roll over my 401(k), can I still contribute to a retirement account that year?
A: Yes, absolutely. You can still contribute to your 401(k) at your new job or to an IRA (if eligible). The rollover doesn’t count as a contribution, so it doesn’t affect your ability to put in new money up to the legal limits.

Q: Do employers match rollover contributions?
A: No. Employer matching only applies to contributions from your current pay. A rollover is just moving your existing money, so it doesn’t qualify for any match from a new employer’s plan.