401(k) Rollover Mistakes That Trigger IRS Penalties

Rolling over a 401(k) into an annuity sounds simple. But the IRS has rules, and breaking them can cost you.

The most common mistake is the indirect rollover trap. If you receive a check from your 401(k) instead of sending the money directly to the new account, the plan must withhold 20% for federal taxes. You then have 60 days to deposit the full original amount including that 20% into the new account. If you miss the deadline or short the deposit, the IRS treats the entire balance as a taxable distribution.

Another mistake: mixing Roth and traditional dollars. If your 401(k) has Roth contributions, they must go into a Roth annuity or Roth IRA. Mix them with pre-tax money and you trigger a taxable event.

And if you are 73 or older, you must take your Required Minimum Distribution for the year before completing any rollover. Rolling RMD-eligible funds into an annuity is not allowed.

A direct trustee-to-trustee rollover avoids all of these issues. The money never touches your hands, and the transfer is seamless.