Dave Ramsey Says This 401(k) Mistake Could Cost You Thousands
One paperwork choice when rolling over a 401(k) can quietly shrink the account before the money ever reaches its new home, and the IRS gives you just 60 days to fix it or face the consequences.
Leaving a job near retirement usually means deciding what to do with a 401(k), and Dave Ramsey continues warning listeners about one paperwork choice that can possibly take thousands of dollars out of the account. On an August 11, 2026 episode of The Ramsey Show, a caller asked how to handle her husband’s 401(k) after he left his employer. Ramsey told her to arrange a direct transfer.
Ramsey explained why: “You have to do it that way or you’re going to get messed up. Because if they send you the check, they are required by the federal government to withhold 20%.”
In a direct transfer, the saver signs the paperwork and the old employer’s HR department “will send the money directly to the mutual fund.” The money never passes through the saver’s hands.
Ramsey’s 20% Withholding Rule Explained
A rollover moves retirement savings from one tax-advantaged account to another, such as from a 401(k) to an individual retirement account (IRA), without creating a tax bill. Most lump-sum payouts from a workplace plan qualify as an “eligible rollover distribution,” which simply means the law allows that money to be rolled over.
As Ramsey noted, under federal law, the payer of an eligible rollover distribution must withhold 20% of it when paid to you. Withholding means the plan sends that portion to the IRS as an advance payment on your income taxes. A direct transfer avoids it. According to IRS Publication 590-A, with the direct rollover option, “no tax is withheld from any part of the designated distribution that is directly paid to the trustee of the traditional IRA.”
Why the Rollover Check Comes Up Short
A check made out to you arrives smaller than your balance. To continues the whole rollover tax-free, though, the full original amount has to be deposited in the new account. You have to cover the withheld portion with your own money.
The IRS gives a simple example. On a $10,000 distribution, the plan keep back $2,000, so you receive $8,000. To roll over the full $10,000, you have to find $2,000 somewhere else, whether from savings or a loan. If you deposit only the $8,000, the missing amount counts as income for that year.
Ramsey made the same point on a 2023 show: “If they send you a check, they have to withhold 20% and you don’t have 100% to do the rollover and you’re going to end up paying taxes on that other 20.”
A 60-Day Deadline Starts When the Check Arrives
A rollover that passes through your hands is called an indirect rollover, and it comes with a deadline. You have 60 days to deposit the money into a new retirement account, and the timer starts when you receive the check. It continues running whether or not you’ve gotten around to the deposit.
Any amount you don’t replace within that window is treated as a taxable distribution. If you’re under age 59 1/2, you also owe a 10% early withdrawal penalty. The IRS says that penalty applies to the taxable part “including an amount equal to the tax withheld” that isn’t rolled over. So money you never received can still trigger a penalty.
Ramsey summed up the rule on a 2025 episode: “They have to withhold 20%, but you have to put a hundred percent into an account within 60 days to avoid taxation.”
Ask for a Trustee-to-Trustee Transfer Before Leaving
Before any money moves, ask the old plan for a direct rollover, also called a trustee-to-trustee transfer. The trustee is the company holding the account, and in this setup the money goes straight from one institution to the other. Federal rules exempt this method from the 20% withholding Ramsey warns about.
Advisors differ on where the money should end up. Ramsey prefers rolling it into an IRA for more control. On The Clark Howard Podcast, Wes Moss told a listener that an old 401(k) can stay where it is: “As long as it’s invested and you like it, that’s totally fine.” Whichever destination you choose, the direct method continues the withholding off the table.
Job Changers With Big Balances Have the Most at Stake
Because the withholding is a flat percentage, it grows with the size of the account. Workers who change jobs with large balances would need the most out-of-pocket cash to make the rollover whole. In a 2022 call, Ramsey warned a caller with a large rollover that the tax bill could exceed the withholding, adding, “They are not required to do that if you do a direct transfer rollover.” Decide the transfer method before your last day on the job.
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Chris Lange is a financial and geopolitical writer with more than a decade of experience covering a myriad of topics. He has published thousands of articles for 24/7 Wall St., with past coverage focused heavily on stocks, IPOs, healthcare, defense, global affairs, and technology.
His work has been quoted, or referenced by a number of outlets including Business Insider, USA Today, Yahoo Finance, MSN, The Motley Fool, and many other publications. A graduate of Southwestern University, he studied business with a focus on investments and has previous experience in banking and startups.
When not reading or writing the news, he is following his passion for Lacrosse, playing chess, or building solar projects with his dad.
