2 Costly Rollover Mistakes

Rolling over your 401k can be one of the most confusing things, more confusing than enrolling in the 401k to begin with. For majority of us, we are not well versed in investing and so the idea of having to figure out what to do when we leave our current employer can be very stressful. You can get 401k rollover info, but you really have to focus on making the right choices. Here are 2 common mistakes that we make in regards to our 401k rollover:

It can sound very appealing to not take the direct rollover when you are rolling over your 401k. The idea of having a check made out to you may sound very attractive especially if you are having any short term cash flow needs. The only problem with this is that you leave yourself open to problems.

The first thing you need to understand is that you will not receive a check for the full balance. Your employer is required to hold 20% of the gross amount if the check is made out to you, as prepayment o your income taxes. Yes, the tax man is at it again. So, lets say you are going to rollover $20,000 and you want the check, you will actually receive $16,000. You then have 60 days to deposit that $16,000 plus come up with the additional $4,000 to avoid any fees or penalties.

Say you miss the deadline and do not deposit any of the money within 60 days. The entire amoutn is now considered to be a taxable distribution. This means you will have to add $20,000 to your taxable income for the year and so you will end up paying income tax on that amount. Under the retirement age? Tack on another 10% for an early withdrawal penalty.

As you can see, in the beginning this option seems like a great way to get some cash for a temporary situation. However, if you are not on top of it and miss the deadlines or cannot come up with the 20% that was withheld as prepayment, you will pay for it dearly.

If you are not sure of what to do, or have a lot of questions and confusion in regards to your 401k rollover, you should absolutely seek a professional for assistance. Your retirement fund took you a long time to build and so it is not something you should take lightly.  Making even a small mistake could cost you a lot in the long run.  If you are not 401k savvy or unfamiliar of the steps to take, take a look online to find a reputable tax adviser or financial advisor to help you through the process.