Avoid These 7 Mistakes When Rolling Over Money Between Retirement Accounts
Avoid These 7 Mistakes When Rolling Over Money Between Retirement Accounts
Laura Beck Fri, May 10, 2024
One of the most important financial decisions you’ll make is how to handle your retirement accounts when changing jobs. Rolling over your 401(k) or other accounts correctly can ensure your hard-earned retirement savings keep growing tax-deferred. But making mistakes during this process can cost you big time in taxes, penalties and lost future growth.
Here are six potentially costly mistakes to avoid when rolling over retirement money, according to financial advisors.
Having the Rollover Check Made Payable to You
“Rolling over your 401(k) to an IRA or another 401(k) is usually done by check. Do not have the check made out to yourself!” said Jake Skelhorn, CFP and former Merrill Lynch advisor now at Spark Wealth Advisors. “This is taxable and will be subject to a mandatory 20% withholding. The rollover check needs to be made payable to the gaining institution, or sometimes the name of your employer if it’s a 401(k).”
Not Paying Off 401(k) Loans First
“Pay off any loans prior to rolling over,” Skelhorn shared. “Most of the time, processing a rollover closes your old 401(k), which will cause you to default on any outstanding loan balances.
The loan will be reclassified as a withdrawal and subject to taxes and possibly penalties. If you can, pay off the loan first to not only avoid taxes but put more money back into the tax-deferred account where it can continue compounding.”
Using a 60-Day Indirect Rollover
“Using a 60-day rollover, also called an indirect rollover, is a huge mistake,” said Stephen Kates, CFP and principal financial analyst for Annuity.org. “All rollovers should be set up to transfer in what is called a ‘trustee-to-trustee transfer’ process instead.”
With a trustee-to-trustee transfer, the money moves directly between financial institutions without you taking possession of it. This avoids the 60-day time limit, mandatory 20% tax withholding and risk of forgetting to redeposit funds before the deadline.
“A trustee-to-trustee transfer means that the money will move directly between the financial institutions and will not be received or handled by the person who owns the account,” Kates said. “This is a cleaner and safer way to transfer the money and will limit any mistakes.”
Not Separating Pre-Tax and Post-Tax Funds
“It is important to understand the tax status of your retirement money especially if you have a mixture of pre- and post-tax contributions in your retirement account,” Kates said. “When making transfers, investors will need to direct pre- and post-tax money to separate accounts to make sure they are not either commingled incorrectly or mailed out as a retirement distribution.”
Being Unprepared With Transfer Details
Before initiating a rollover, you’ll need to have these key details about the receiving account:
Name of the receiving institution
Address of the receiving institution
Account number at the receiving institution
Type of account (IRA, 401(k), etc.) to receive the funds
“Prepare the necessary information before you start your transfer,” Kates said. “Most institutions need [these] four pieces of information to complete a transfer.”
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