• Episode 282: Why Waiting Until 70 for Social Security Can Backfire (And the Question to Ask Instead)
• Episode 302: 3 Things RMD Timing Actually Affects (And How to Choose Your Schedule)
• Michael Kitces: Why the Net Unrealized Appreciation (NUA) Rules Aren’t Always a Great Deal
• Exceptions to the 10% Tax on Early Retirement Plan Distributions, Including the Age-55 Rule and 72(t) Payments (IRS)
• Rollovers of Retirement Plan and IRA Distributions: Direct Rollovers, 20% Withholding, and the 60-Day Rule (IRS)
• Cancel Your Social Security Benefits Application (SSA)
• How to Avoid the Medicare Part B Late Enrollment Penalty (Medicare.gov)
• Health Savings Accounts and Medicare: Contribution Limits, Excess Contributions, and Premiums You Can Pay (IRS Publication 969)
• Kennedy v. Plan Administrator for DuPont Savings and Investment Plan – U.S. Supreme Court (2009)

Most of the financial decisions you make in retirement can be revisited later. 

You can rebalance your portfolio, adjust withdrawals, or change your Roth conversion strategy as your circumstances evolve. That flexibility is one of the most reassuring parts of a good retirement plan. 

But some decisions are difficult, if not impossible, to undo. Others give you only a short window to change your mind. 

And the timing makes them especially easy to overlook. Many come up when you’re leaving your job, deciding when to start drawing from your portfolio, or enrolling in Medicare. 

With so much happening at once, a decision with lasting consequences can easily look like routine paperwork.

So, in today’s episode, I’m walking through nine of these decisions, roughly in the order you’re likely to face them. 

For each one, I’ll explain why it’s hard to reverse, the lesser-known rules and exceptions that could help, and what to consider before moving forward. 

Some of these decisions may be years away. But knowing what to watch for now can help you recognize the stakes—and ask the right questions—while you still have options. 

Welcome to another episode of the Stay Wealthy Retirement Show. I’m your host, Taylor Schulte, and every week I cover the most important financial topics to help you “stay wealthy” in retirement. Ok, onto today’s episode.

9 Retirement Mistakes You May Not Be Able to Undo

Here’s how we’ll work through the nine retirement mistakes. We’ll start with the day you leave your job, then move on to income, Medicare, and taxes. And then we’ll wrap up with an important decision that can significantly affect your family after you’re gone. It often comes down to a form many people completed years, or even decades, ago and haven’t looked at since, and I’ll share a real case where that form ended up mattering more than an official divorce decree.

So, let’s begin with your 401(k), which is where the first three mistakes we’re covering all show up.

Mistake #1: Rolling Company Stock Into an IRA Without Checking the Tax Consequences

The first mistake is rolling shares of your employer’s stock from a pre-tax 401(k) into an IRA without checking a special tax rule called net unrealized appreciation, or NUA. 

Normally, withdrawals from a traditional pre-tax 401(k) are taxed as ordinary income – just like your paycheck. But if your 401(k) account holds stock in the company you work for, and those shares have increased in value since you’ve owned them, a special exception may apply. 

Instead of rolling the shares into an IRA along with your other investments, you may be able to move them into a taxable brokerage account. You’ll still pay ordinary income tax on what the plan originally paid for the shares, known as the cost basis, but the growth above that amount qualifies for more attractive long-term capital gains treatment when you sell, even if you sell immediately. 

Here’s an example. Let’s say you’re an engineer at Microsoft and your 401(k) holds $500,000 of Microsoft stock that was originally purchased for $100,000. If you roll those shares into an IRA when you leave the company or retire, the full $500,000 will eventually be taxed as ordinary income when you take future withdrawals. At today’s federal rates, that means you could be taxed as high as 37%.

With NUA treatment, however, you pay ordinary income tax on just the $100,000 cost basis up front, the amount the stock was originally purchased for. The remaining $400,000 of growth is taxed at more favorable long-term capital gains rates when you sell shares, which currently top out at 20%. And fun fact, as an added benefit, that $400,000 is also generally exempt from the additional 3.8% net investment income tax.

But here’s the catch: If you overlook this strategy and roll those shares into an IRA along with your other 401(k) investments, you permanently lose the opportunity to take advantage of it. 

Now, it’s worth calling out that using this strategy and applying NUA treatment to your company stock isn’t automatically the better option. Maybe the stock hasn’t appreciated enough or you’re in a high tax bracket and paying tax on the cost basis up front is unreasonably expensive. The eligibility rules are extensive and rigid, and need to be factored into your decision too. 

So, the takeaway before quickly and blindly moving company stock out of your 401(k) is to run the comparison before you act, ideally with a tax planning expert who has the expertise to help. 

Mistake #2: Giving Up the Age-55 Withdrawal Exception

And company stock isn’t the only thing a rollover can take off the table.

Mistake number two is rolling your 401(k) into an IRA when retiring or changing jobs and, in the process, giving up penalty-free access to your savings before 59½.

As a refresher, if you take a withdrawal from a pre-tax retirement account before age 59½, you are hit with a 10% penalty in addition to being on the hook for the tax bill. However, there’s an exception, often referred to as the Rule of 55. In short, if you leave your job during or after the calendar year you turn 55, withdrawals from that employer’s 401(k) can avoid the 10% penalty. 

And that calendar-year detail matters. If your 55th birthday is in July, you could leave in January of that same year, six months before you actually turn 55, and still qualify. 

IRAs don’t offer this exception, so if you overlook this opportunity and roll your 401(k) money into an IRA, you lose the ability to take advantage of it.

This is one of the primary reasons we often suggest clients hold off on a rollover until we’ve mapped out where their income will come from before age 59½. Keeping the money in the plan may provide valuable flexibility. And because the rule of 55 only applies to the plan sponsored by the employer you’re leaving, it may also make sense to move older 401(k) balances into your current employer’s plan before you leave, assuming the plan allows it. 

Lastly, it’s important to highlight that a rollover doesn’t have to be an all-or-nothing decision. You could leave enough in the 401(k) to bridge the gap to 59½ and transfer the rest into an IRA at the custodian of your choice. 

Just keep in mind that your employer 401(k) plan still decides how you can access the money. For example, some plans only allow you to withdraw the entire balance at once, so don’t wait until the last day to check the rules. 

And if your savings do end up in an IRA, know that you still might have options for accessing the money before age 59½ without paying the 10% early withdrawal penalty. One option is to take a series of substantially equal periodic payments – this is known as rule 72(t). But the rule is complex, and one small mistake in how you manage those withdrawals can disqualify the exception and trigger penalties retroactively.

Mistake #3: Having a Rollover Check Made Payable to You

Now, once you’ve decided exactly what to roll over, how you move the money matters, too. 

The third mistake is having your 401(k) rollover check made payable to you instead of your new IRA custodian (i.e., Fidelity, Vanguard, Schwab, etc.). 

With a direct rollover, the transfer goes straight to your new IRA custodian for your benefit. And since it’s going from one pre-tax retirement account to another, the plan does not withhold federal income tax from the amount directly rolled over.

However, if instead a check is made payable to you personally and sent to you to deposit, the rules change. In that situation, the 401(k) plan is generally required to withhold 20% for federal taxes, even if you intend to deposit the entire amount into a pre-tax IRA. 

With a check in hand, you generally have 60 days to deposit the full amount into your IRA to avoid taxes and penalties. And here’s what catches people off guard: that “full amount” includes the 20% that was withheld by your old employer’s 401k plan, which you’ll need to replace using other savings.

Here’s what that looks like with a $500,000 rollover. If the rollover check is payable to you personally, you’ll only receive $400,000, with the remaining $100,000 withheld by the plan for federal taxes. In order to roll over the full amount, you’ll need to come up with that missing $100,000 from other savings and deposit the full $500,000 into your IRA within 60 days.

If you only deposit the $400,000 you received, the remaining $100,000 would be fully taxable. And if you’re under age 59½, a 10% early-withdrawal penalty may also apply, unless you qualify for an exception.

Now, to be clear, the withheld $100,000 isn’t an additional tax. It counts toward your federal tax bill, and you may get some or all of it back when you file your tax return depending on the situation. But that doesn’t help you meet the 60-day rollover deadline. 

And to avoid any confusion, there’s one important distinction I want to make: A check made payable to your new IRA custodian “for the benefit of” you still qualifies as a direct rollover and avoids the 20% mandatory withholding, even if it’s mailed to your home. For example, a rollover check going to a Fidelity IRA might say “payable to: Fidelity Investments For the Benefit of (or FBO) Jane Smith IRA” along with her full IRA account number on the memo line. 

What matters is who the check is made out to, not that it was mailed directly to Jane’s home. If the check was instead made payable to Jane Smith, the 20% tax withholding would apply. 

And for what it’s worth, if you miss the 60-day deadline, the IRS does offer relief in certain situations, such as an error by a financial institution, but I certainly wouldn’t plan around it. 

Mistake #4: Choosing a Pension Payout Without Planning for a Surviving Spouse

Ok, that covers the three mistakes tied to your 401(k). The next two involve turning on retirement income, beginning with pensions. 

Mistake number four is choosing the biggest monthly pension check without considering what happens to your spouse after you die. 

For example, choosing the single-life pension option typically pays the most income each month, but those payments stop when you die. A joint-and-survivor option, on the other hand, pays less upfront but continues paying your spouse after your death, often 50%, 75%, or even 100% of your benefit. 

In many plans, this decision becomes permanent once payments begin, even if you later divorce or your spouse passes away first. And if you’re married, choosing the single-life option often requires your spouse’s written consent, witnessed by a notary or plan representative, since a premature death and loss of that income stream could dramatically affect their financial situation. 

Plan forms like this one can carry more weight than many people realize. In fact, that idea is at the center of the ninth and final mistake on our list, which includes a real case where a dispute over a retirement plan form went all the way to the U.S. Supreme Court. 

But before we get there, back to your pension choices. For those fortunate enough to have a pension, a feature worth asking about is a “pop-up” benefit. If you have this benefit and your spouse predeceases you, your monthly payment increases to the single-life amount, but you typically have to accept a slightly smaller check upfront in exchange. 

Ultimately, the bigger monthly payment isn’t necessarily the better choice for your household. When we help clients evaluate their options, we focus heavily on what happens to the surviving spouse’s income. After the first death, the household typically loses one Social Security check, and as I explained in episode 308 a couple of weeks ago, the survivor may also face higher income taxes when they begin filing as a single taxpayer. 

Losing a pension on top of those changes can put significant strain on their retirement plan. So, before making your election, carefully review your plan’s rules and compare how each option would affect your spouse’s financial security.

Mistake #5: Claiming Social Security Without Understanding the Limited Do-Over

Social Security is another income decision where the window to change your mind is shorter than many people assume. 

And that brings us to mistake number five: claiming benefits without understanding just how limited your options are if you later have second thoughts.

Now, Social Security does offer a do-over, but the rules are strict. You generally have just 12 months from when you first became entitled to benefits to withdraw your application. If you take advantage of this, Social Security treats it as though you never filed.

But you can only use this do-over once in your lifetime, and there’s a catch: You must repay everything you and your family received, including amounts withheld for Medicare premiums and taxes. 

For example, if you collected $2,500 a month for 10 months, you’d need to repay the $25,000, plus any benefits paid to family members on your record. Once that 12-month window closes, you can no longer undo your original claim. 

However, when you reach full retirement age, which is between 66 and 67 depending on when you were born, you do have another option. At full retirement age, you can voluntarily suspend your payments, allowing your benefit to grow by up to 8% per year until age 70. 

That’s a potentially valuable opportunity, but it doesn’t erase any reduction from claiming early. The delayed credits simply increase your already-reduced benefit. 

There are also a few trade-offs to consider. While your benefits are suspended, payments to family members on your record generally stop, although divorced spouses are an exception. And if you’re enrolled in Medicare Part B, you’ll need to pay those premiums directly while benefits are suspended as well. 

As we explained in episode 282, which I’ll provide a link to in the show notes, there are plenty of good reasons to claim Social Security before age 70 – the important thing is to make that decision knowing how difficult it can be to change course later.

Mistake #6: Missing Medicare Part B Enrollment Without a Valid Exception

And speaking of delaying Social Security, there’s an important Medicare deadline to keep in mind. 

If you’re already receiving Social Security when you turn 65, you’re generally enrolled in Medicare Parts A and B automatically. 

But if you’ve delayed claiming benefits, you’re typically responsible for signing up yourself. 

And that brings us to mistake number six: missing your Medicare Part B enrollment deadline without qualifying for an exception. 

The reason this can be costly is that Medicare imposes a penalty when you don’t enroll on time. In fact, for every full 12 months you could have had Part B but didn’t sign up, your monthly standard premium generally increases by 10%. And you’ll typically pay that penalty for as long as you have Part B.

So if you delay enrollment for three full years without a valid exception, you’ll be paying 30% more every month. And because that penalty is a percentage of the standard premium, the dollar amount generally increases as premiums rise over time. 

Fortunately, there’s an important exception for people who have health insurance through their own or their spouse’s current employment. In that situation, you can generally delay Part B and still have eight months to enroll after the employment or coverage ends, whichever happens first. 

However, it’s important to know that COBRA and retiree health coverage don’t extend that deadline. So, if you retire at 66 and stay on COBRA for 18 months, your eight-month enrollment window starts when you leave your job, not when COBRA ends. 

There’s also an important consideration if your employer has fewer than 20 employees. In that case, Medicare generally becomes your primary insurance at 65, even if you’re still working. And without Part B, your employer’s plan may leave you responsible for significant medical bills. 

Now, some relief is available, including special enrollment periods for certain exceptional circumstances and Medicare Savings Programs for people with limited income. But the best approach is to confirm that you qualify for an exception before deciding to delay Part B.

Mistake #7: Contributing Too Much to an HSA When Medicare Starts

Getting your Medicare timing right can also create a different problem if you’re still saving in a health savings account, or HSA.

Mistake number seven is continuing to contribute to an HSA after your Medicare coverage begins.

Once you’re enrolled in Medicare, even just Part A, your HSA contribution limit drops to zero for every month you’re covered. That applies even if you’re still working and have insurance through your employer. 

But here’s what makes this tricky. If you enroll in premium-free Part A after 65, your coverage is generally backdated up to six months, but not before you first became eligible. And because claiming Social Security after 65 generally triggers Part A enrollment, the same backdating rule applies. 

For example, let’s say you’re 67, still working and contributing to your HSA. You apply for Social Security in July, and your Medicare coverage gets backdated to January. Suddenly, your HSA contribution limit for the entire year could be zero, making everything you’ve contributed an excess contribution. 

That’s why a common rule of thumb is to stop contributing six months before applying for Medicare or Social Security after 65. 

A few other details matter as well. For example, your HSA limit depends on the months you were eligible, not when you made the deposits, and employer contributions count, too. And if you contribute too much, you can generally correct it by withdrawing the excess and its earnings by your tax-filing deadline, including extensions. Otherwise, a 6% penalty generally applies each year the excess remains. 

The good news is that you can still use your existing HSA funds tax-free for qualified medical expenses, including Medicare Part B, Part D, and Medicare Advantage premiums. Medigap premiums, however, don’t qualify.

Mistake #8: Failing to Plan How You’ll Pay Taxes in Retirement

An excess HSA contribution can create a tax headache, and that brings us to mistake number eight: not having a plan for how you’ll pay taxes once your paycheck stops. 

While you’re working, your employer withholds taxes from every paycheck. In retirement, you generally have to arrange that yourself. Otherwise, the IRS may charge an underpayment penalty, even if you pay your full tax bill when you file. 

To avoid that penalty, your withholding and estimated payments generally need to cover at least 90% of this year’s tax or 100% of last year’s. That second number increases to 110% if your adjusted gross income last year exceeded $150,000. 

But here’s a lesser-known rule I covered last month that can make this easier. Federal taxes withheld from an IRA distribution are generally treated as though they were paid evenly throughout the year, even if the withholding happens in December. 

So, if you’ve fallen behind on your taxes, increasing the withholding on a year-end IRA withdrawal can help you catch up. That withdrawal can be an RMD, but it doesn’t have to be — the key is to withhold enough by December 31. An estimated tax payment made in December doesn’t get that same treatment – it generally counts only when you make it. 

One other detail worth knowing: If you withhold federal taxes from Social Security, you can only choose from four fixed rates: 7%, 10%, 12%, or 22%. 

Now, late-year IRA withholding won’t work in every situation, and your state may have different rules. But for many retirees, it’s a simpler way to stay on track and avoid unnecessary penalties.

Mistake #9: Assuming Your Will Updates Your Retirement Account Beneficiaries

Up to this point, every mistake on our list has affected you directly. But the final one affects the people you leave behind, and it’s where the Supreme Court case I mentioned earlier comes in.

The ninth and final mistake is assuming your will, or even a divorce judgment, determines who inherits your retirement accounts. 

And the story about William Kennedy helps to explain why. William was an employee at DuPont, and in 1974, he named his wife, Liv, as the beneficiary of his company retirement savings plan. 

Twenty years later, they went through a divorce, and Liv gave up her rights to his retirement benefits as part of the divorce decree. However, William never updated the beneficiary elections on his account. As a result, when he died in 2001, the plan paid the roughly $400,000 balance to Liv. 

William’s daughter challenged the payment, and the case eventually reached the U.S. Supreme Court. In 2009, the Court unanimously ruled that the plan had properly followed the beneficiary form, even though Liv had clearly waived her rights to those dollars in the divorce. 

Now, beneficiary rules can vary by state and by plan, so please treat this as education, not legal advice, and always check with a trusted advisor before taking action. 

But what this story highlights is that, for most retirement accounts, the beneficiary designations on file with the financial institution generally determine who inherits your retirement dollars, not your will or a divorce decree. 

With a 401(k) and many other employer plans, there’s another important wrinkle: Your spouse generally has a legal right to inherit the account, even if you’ve clearly named someone else as the beneficiary. 

For example, you could name your children as beneficiaries after a divorce, get remarried, and still want your children to inherit the money. But unless your new spouse formally waives their rights to your retirement account in writing, with their signature witnessed by a notary or plan representative, they could inherit the account instead. 

In other words, even a beneficiary form that accurately reflects your wishes may not be enough. And in case you’re wondering, a prenuptial agreement generally won’t satisfy that waiver requirement either because it’s signed before the marriage.

Divorce can make things even more complicated. Certain court orders can give a former spouse rights to your retirement benefits, and ending a marriage doesn’t necessarily remove an ex-spouse as your beneficiary, especially with workplace retirement plans. So, don’t assume your divorce automatically settles who inherits your retirement savings.

The safest approach is to review the beneficiaries listed on every retirement account, including your backup beneficiaries, at least once a year. It’s also a smart idea to make it a regular habit to review them after major life events, especially marriage, divorce, or a death in the family.

The Bottom Line

If there’s one thing I hope you take away from today’s episode, it’s that some of the most expensive retirement mistakes can be avoided simply by knowing what questions to ask before making a decision. 

And that’s particularly important during major life transitions, when you’re often making several financial decisions at once and may not realize that some come with permanent consequences.

So, here’s what I’d encourage you to do. First, think about the next major milestone in your retirement. Maybe you’re planning to leave your job, start Social Security, or enroll in Medicare. If one of those decisions is approaching, take some time now to understand your options and the rules that apply to your situation. 

And if you’re already retired, consider using this episode as a reminder to review your beneficiary designations and make sure your tax withholding is on track. 

Then, whenever you’re facing an important financial decision, get in the habit of asking three questions: 

What options might I be giving up? Could this decision affect my spouse or family? And is there a deadline or exception I need to know about? 

Those three questions can help you recognize when a decision deserves a little more research, a closer look at the numbers, or guidance from a qualified professional. 

And remember, you don’t need to memorize every rule we discussed today. What matters most is knowing they exist, recognizing when they become relevant, and giving yourself enough time to make an informed choice. 

Because one of the greatest advantages you can have in retirement is the ability to make decisions on your own terms, while your options are still available. 

Thank you, as always, for listening. To view the research and resources referenced in today’s episode, head over to youstaywealthy.com/310.