4 Epic 401(k) Rollover Blunders

Updated: Nov 15, 2019



With a booming Trump economy and employment running now at over 96%, many people in the United States are transitioning from one employer to another. Many people are still uncertain about what to do with their 401(k) plan when they leave their employer. Here are 4 of the biggest mistakes we see when considering what to do with your 401(k).

Mistake 1 – Taking A Check Made Out To You

Taking a check made out to you is a bad idea altogether, and truly defeats the purpose of having dollars earmarked for retirement. The real problem people do not think about before they get a check are the consequences. If you are under 59 ½ years of age, you will pay a 10% early distribution penalty. (source: www.irs.gov). In addition, the distribution will be treated as ordinary income in the tax year you take the distribution. This could potentially cost you up to 30 to 40% of your balance based upon your personal income tax brackets. Last, the government withholds 20% of your check when you get a check directly made out to which will make your net check from the 401(k) even lower. While you may be eligible to get some of this back when you file your taxes, consider what the real check amount will be no matter how small or how large your balance is within the 401(k) plan.

Mistake 2 – Doing Nothing

Many people are unaware of how a direct transfer of your 401(k) plan to a rollover IRA actually works. Since it can be a very intimidating process, many people just choose the path of least resistance and leave the money at their old place of employment. Since most 401(k)'s are limited in their investment choices at work, there is a huge opportunity being missed by having the ability to choose between all of the different investment vehicles in the market place versus just the investment choices you have at work. A rollover IRA account can be invested in CD's, stocks, bonds, mutual funds, real estate, and much more. If the paperwork is done correctly, a 401(k) to rollover IRA transfer can be one of the easiest things to get done in your personal financial picture to gain control of your retirement.

Mistake 3 – Net Unrealized Appreciation

Some people work for companies where they buy you (or you are buying) company stock in your retirement plan. When you leave your employer, there is a crucial tax management decision on what you should do with the company stock. In essence, you have an opportunity to pay ordinary income tax on your cost basis of the company stock but pay capital gains tax on the growth if the election is done successfully. Once you rollover your 401(k) to an IRA, this election will no longer be available. People who have worked for a long period of time for one employer where they have a sizable amount of company stock do not often realize the implication of missing out on Net Unrealized Appreciation. Please go to http://www.irs.gov/to learn more or we can help you review the best options if you have this scenario.

Mistake 4 – Leave It In “The Set It and Forget It” Strategy. Being Lazy.

Since marketing companies are smart, one of the products packaged the most today in 401(k) plans are the Target or Lifecycle Retirement funds that typically have a date such as Target 2035 in your 401(k) plans. The idea of these funds is that the fund company will do the work and adjust the balances until you retire in 2035. We believe one of the biggest mistakes people make with their old 401(k) plan is doing a strategy such as this, or even worse just leaving the current mix they have in their 401(k) and never revisiting it on a year to year basis. These types of funds are simple and low cost to own, but they had a very bad performance during the stock market meltdown of 2008 and most people who owned these funds DID NOT get the protection they hoped these funds would provide.


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