Avoid these Costly 401k Rollover Mistakes

Dealing with 401k rollovers is something that does not come up very often and therefore is not a process that is fully understood. The 401k industry is highly regulated by the government and if everything is not done according to their rules, you could end up losing a lot of money in penalties and fees. There are a few common 401k rollover mistakes that you will want to watch out for if the situation comes up.

Time Limits

When you do a 401k rollover, many people do not pay attention to the time limits involved. Most of the time, you will be subject to a time limit to get the rollover done. If the 401k company cuts you a check to redeposit into another 401k, then you are in charge of the money. If you do not redeposit the money into a qualified 401k within the time limits, the government will treat it as an early distribution. The last thing you want to deal with is an early distribution as you have to pay a 10% penalty on the money and pay taxes on the money. This could end up costing you as much as half the money in fees and taxes. Typically, the timeframe is 30 days but can vary depending on state, company and federal statutes.

Cashing Out

Another common mistake that people make is simply cashing out the account when they leave a job. They think that once they get another job, they will use that money to put into the account and get started. However, when you do this, you will lose a good percentage of the money in the process. This is treated as an early distribution as well and you will have to pay the 10% early distribution penalty again. If you are planning on using the money to fund another 401k account, you would be better off to leave the money in the account until you start a new retirement account. Then, when the time comes, you can request a 401k rollover with your new provider. They will have an easy set of forms to fill out and they will take care of the rest. You will simply have to prove that you own the old account and they will transfer the money for you. This way, you do not lose a big percentage of the money in the transfer and your retirement is still on track.

Employer Advice

401ks are a complicated topic that should be discussed with a plan administrator or a trained professional. CPAs are also good resources that understand how 401ks work and can guide you with your 401l decisions and the rollover process.

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