Solo 401k Example

401k Rollover Mistakes To Avoid

The big day has arrived. You are retiring and have decided to rollover your 401k plan to your own personal IRA. This is a big moment in your life and you want to make sure you do it right. Here’s a few things not to do with your 401k rollover…

1. Choosing incorrect 401(k) distribution options

Choosing the wrong distribution option could cost you a lot of money and headaches. Before making a final decision, it’s critical that you understand the financial stakes of each of your rollover options.

2. Making premature 401(k) distributions.

Retirement distributions before age 59 ½ are usually not a good idea. For one, a good part of your proceeds will go to pay the IRS for a 10% early withdrawal penalty, plus income tax on the amount withdrawn. Double check and make sure that your 401k is structured properly to ensure avoiding the penalty.

3. Relying on employers to give rollover advice.

Most employers are not qualified or licensed to give financial advice, yet many employees look to them for direction. Would you talk to a dentist about your back problems? Finding which rollover options best meet your needs usually requires professional help. Who’s a good candidate?  Start with a Certified Financial Planner™.

4. Not properly designating an account beneficiary(s).

Should I name my spouse as beneficiary or my children? A trust? What effect would naming a certain beneficiary for my IRA have on other beneficiaries? What are the tax consequences of choosing one beneficiary over another? If you don’t know the answers to these questions, you probably need to confer with a Certified Financial Planner™.

5. Forgetting to pay back any outstanding 401(k) loans before exiting the plan.

Failing to pay back an outstanding loan in a 401(k) plan before distributing or rolling over your funds, could cause you to pay income taxes on the amount of the outstanding loan. Proceed with caution.

6. Subjecting 401(k) rollovers to 20% withholding tax.

Distribution proceeds paid directly to you instead of being paid the company that you are rolling over to for your benefit will trigger this. Which do you prefer, 80% of your rollover money or 100%? Withholding tax can usually be avoided with direct rollovers.

7. Not taking advantage of the 60-day window.

If you’ve received a direct distribution, it’s likely that 20% withholding tax has been applied to your rollover. That’s the bad news. The good news is the IRS allows a 60-day window in which to place the 80% you receive into an IRA or other qualified retirement plan. Not taking advantage of this provision could subject your funds to IRS penalties.


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Comments | 1 Response

  1. lito cunanan says

    hi jeff,
    I just left my employer on 2/11/2011 and started with a new employer on 2/14/2011. I am 49 yrs old. I am not sure if i want Roth IRA or do Traditional
    retirement IRA. I have compared similarities & differences of the 2 from a chart from another website..and you are correct why will i ask my dentist of my back problem.. The figures are not that much $26k on 401k and about the
    same amount from a thrift plan from a previous employer. I know i dont want to pay penalty taxes and is it true that 20% of the balance will be retained by the 401k provider…

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