|
|
7 Common Rollover Mistakes
| |
- Choosing incorrect 401(k)
distribution options on the distribution forms provided
by the employer.
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.
- 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penalty, plus income tax on the amount withdrawn.
It's not uncommon for some participants to only net
60-to-75% of their actual distribution.
- 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.
- 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 rollover professional.
- 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.
- Subjecting 401(k) rollovers
to 20% withholding tax.
Distribution proceeds paid directly to 401(k) participants
is subject to IRS 20% withholding tax. Which do you
prefer, 80% of your rollover money or 100%? Withholding
tax can usually be avoided with direct rollovers.
- 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.
|
 |
|
|
|
