8 Retirement Rollover Mistakes That Cost Pennsylvanians Thousands

Pennsylvania taxes personal income at a flat 3.07% rate. A mishandled retirement rollover can trigger it at the worst possible moment.

Many savers treat moving money between accounts as paperwork, not a taxable event.

But one wrong step can cause the IRS or Pennsylvania to send you a bigger bill than you expected.

These are the retirement rollover mistakes that cost Pennsylvanians thousands.

Note: This is general information, not financial or tax advice. Federal rollover rules and Pennsylvania’s tax treatment of retirement distributions are subject to change, so confirm your situation with the IRS or the Pennsylvania Department of Revenue.

1. Taking the Check

Nearly $941 billion is on pace to move through individual retirement account (IRA) rollovers nationwide in 2026, and each one can go two different ways.

A direct rollover sends the money straight from one custodian to the next, and the saver never touches it.

An indirect rollover cuts the saver a check instead, and that’s where the trouble starts.

The Internal Revenue Service (IRS) requires the plan to withhold 20% of any taxable rollover distribution paid straight to a saver, even when the whole amount is meant to land in a new IRA within 60 days.

Roll over a $50,000 401(k) that way, and only $40,000 shows up in the new account.

Not the full amount.

To avoid tax on the missing $10,000, the saver has to come up with that amount from savings and deposit the full $50,000 anyway.

Few people have $10,000 sitting around for that.

A direct, trustee-to-trustee transfer skips the withholding completely, since the plan never hands the money to the saver in the first place.

Pennsylvania already taxed a saver’s own paycheck contributions to that 401(k) as compensation, since the commonwealth never allowed the federal pretax exclusion in the first place.

If the saver never replaces and rolls over that withheld $10,000, Pennsylvania taxes only the part of it that exceeds those already-taxed contributions, at the flat 3.07% rate, not the whole amount.

The IRS shows no such courtesy and taxes the entire $10,000 as ordinary income.

2. Missing Your 60-Day Window

A Pennsylvania saver who takes an indirect rollover has exactly 60 days to get the money into a new retirement account.

Miss that window, and the IRS treats the whole distribution as ordinary income for the year, plus a 10% penalty for anyone under 59½.

On a $40,000 IRA, that penalty alone runs $4,000.

Ouch.

Pennsylvania adds its own consequence on top.

Pennsylvania taxes a premature IRA withdrawal using what the state calls the cost-recovery method: The saver’s own already-taxed contributions come out first, tax-free, and only the growth above that amount gets hit with the state’s 3.07% rate.

That protection only holds when the money is timely rolled over into an eligible Pennsylvania retirement plan, on the exact same 60-day deadline as the federal rules.

Blow past it, and the exemption is gone.

The same missed deadline can trigger a federal penalty and a Pennsylvania income tax bill on money that was only ever supposed to change addresses.

3. Rolling Over Two IRAs a Year

More than one IRA doesn’t buy a saver more than one 60-day rollover a year.

The IRS limits savers to one 60-day, indirect IRA-to-IRA rollover every 12 months.

That limit counts across every IRA a person owns, not per account.

Do a second one within the year, and the IRS treats it as an improper rollover contribution.

That turns into an excess contribution, taxed at 6% every year until it’s removed.

On a $20,000 mistaken rollover, that’s $1,200 gone every single year it sits there.

Pennsylvania piles its own tax on top of that federal one, for any saver who hasn’t yet reached the state’s retirement-age threshold.

The improper second rollover counts as an actual distribution before it becomes an excess contribution.

Pennsylvania’s cost-recovery method then taxes the part of that $20,000 above the saver’s already-taxed contributions, at 3.07%, the same way it would treat any other early withdrawal.

Assuming no previously-taxed contributions, that’s up to $614 in state tax on top of the federal excise tax.

A direct, trustee-to-trustee transfer sidesteps the federal limit entirely, since the IRS doesn’t count a transfer between custodians as a rollover at all.

4. Rolling a 401(k) Into an IRA and Losing the Age-55 Exception

A Pennsylvania saver’s 401(k) money keeps a valuable penalty exception right up until it moves into an IRA.

The IRS lets a worker who separates from an employer at 55 or older pull money from that employer’s 401(k) without the usual 10% penalty for early withdrawals.

That exception belongs to the 401(k) itself, not to the saver’s age alone, and it never transfers to an IRA.

A 56-year-old who left a job planning to live off that 401(k) for a few years keeps the exception only by leaving the money exactly where it is.

Roll it into an IRA instead, even after qualifying for the exception at 55 or older, and the exception is gone until age 59½.

A 56-year-old who rolls over a $200,000 401(k) and then needs $20,000 for a bridge-year expense owes a $2,000 penalty they would have avoided by simply leaving the money where it was.

Once the rollover happens, there’s no undoing it.

Pennsylvania measures this same situation against a different age than the federal government does.

A 401(k) still sitting with the old employer is tested against that plan’s own retirement age for Pennsylvania tax purposes, an age the plan document sets, not the federal 55 marker.

Move that money into an IRA, and Pennsylvania switches to testing it against a flat age 59½ instead, no matter what the old plan allowed.

The two clocks don’t match.

5. Rolling Company Stock Into an IRA Instead of Keeping NUA Treatment

A saver who holds company stock inside an old 401(k) has a rollover option nobody explains well.

Net unrealized appreciation (NUA) lets the IRS tax that stock’s growth at the lower capital gains rate instead of ordinary income.

That treatment only applies if the stock comes out of the plan directly, instead of moving into an IRA as part of a rollover.

Roll it into an IRA like every other account, and that special treatment is gone for good.

No second chances.

Every future withdrawal of that stock then follows regular IRA rules, and the IRS taxes it as ordinary income no matter how much the shares have grown.

A saver holding $100,000 in company stock that cost $30,000 to buy loses the shot at capital gains rates on that $70,000 of growth the moment it lands in an IRA.

Pennsylvania has no separate, lower tax rate for capital gains the way the IRS does; a paycheck and investment growth are taxed at the same flat 3.07%.

On that $70,000 of stock growth, the Pennsylvania tax comes to $2,149 whenever it becomes taxable, regardless of which federal path the saver took to get there.

The entire reason NUA beats a rollover, a lower federal rate on the stock’s growth, is a federal advantage only.

That’s a permanent choice, made on a single form.

6. Blending After-Tax 401(k) Money

Savers who made after-tax contributions to a 401(k), on top of the regular pretax kind, carry a rollover trap many custodians never flag.

The IRS applies the pro-rata rule to any partial distribution, splitting it proportionally between pretax and after-tax dollars rather than letting a saver pull out just the after-tax portion.

Roll that blended money into a traditional IRA without separately tracking the after-tax basis on Form 8606, and the IRS taxes every future withdrawal as though none of it was ever after-tax.

A saver with $150,000 in a 401(k), $40,000 of it after-tax contributions, loses track of that $40,000 the moment it lands in an IRA without a Form 8606 filed to preserve it.

The saver ends up paying tax twice on the same dollars.

Nobody wants that.

Pennsylvania complicates that basis question even further.

Pennsylvania already taxed every dollar of the saver’s pretax 401(k) contributions as compensation, since the state never recognized the federal pretax exclusion in the first place.

A Pennsylvania saver’s true after-tax basis is almost always bigger than the federal Form 8606 number, which only counts contributions explicitly labeled after-tax.

Splitting a rollover at the source keeps the two kinds of money apart from the start.

Pretax dollars go to a traditional IRA, after-tax dollars go to a Roth IRA, in the same transaction, and the two basis numbers stay separate.

7. Rolling Over an RMD

Retirees moving an old employer account into an IRA often try to roll over everything sitting in the plan, required minimum distribution (RMD) included.

The IRS won’t allow it.

A required minimum distribution can’t be rolled over under any circumstances, whether it comes from a 401(k) or an IRA.

Deposit that RMD money into an IRA anyway, and the custodian has no way to record it as a rollover.

It counts as an improper rollover contribution instead.

That’s the same 6% annual excise tax that catches a saver who rolls over twice in one year.

It applies to money that should have gone straight to the retiree’s bank account instead of back into an IRA.

On a typical $15,000 RMD mistakenly redeposited, that’s about $900 a year until it’s corrected.

Pennsylvania has no required minimum distribution rule of its own.

The requirement, and the ban on rolling that money over, both come from federal law, not state law.

That federal-only status doesn’t make the mistake any cheaper, since the 6% annual excise tax applies no matter which state a retiree lives in.

8. Moving a SIMPLE IRA Too Soon

A small-business employee with a Savings Incentive Match Plan for Employees (SIMPLE) IRA faces a rollover rule that catches almost everyone by surprise.

A SIMPLE IRA is the retirement plan many small employers offer instead of a 401(k).

For the first two years after the very first contribution lands in that SIMPLE IRA, the money can only transfer to another SIMPLE IRA.

Move it to a traditional IRA or a 401(k) any earlier than that, and the IRS treats the whole thing as an early withdrawal, taxed at 25% instead of the usual 10%.

No exceptions.

On a $30,000 SIMPLE IRA, that’s the difference between a $3,000 penalty and a $7,500 one.

Pennsylvania’s own tax bill on that same mistake doesn’t move at all, no matter which side of the two-year line the saver falls on.

The state has no early-withdrawal penalty to escalate in the first place, just the flat 3.07% cost-recovery tax it applies to any premature distribution.

Assuming none of that $30,000 reflects contributions already taxed by Pennsylvania, that’s a flat $921 either way, on top of whichever federal penalty applies.

Wait out the two years, and the federal penalty drops back down to the standard 10% instead of 25%.

Many workers don’t even know their SIMPLE IRA has a start date, since the two-year clock begins with the very first paycheck contribution, not the date they finally decide to move the money.

A quick call to the plan’s recordkeeper settles the question in minutes, and it’s the only way to know for certain which side of the deadline a rollover falls on.

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