Top 10 Mistakes to Avoid When Rolling Over Your 401(k): Expert Tips for a Smooth Transition

Rolling over a 401(k) plan can be a complex and daunting process, especially if you’re not familiar with the intricacies of the system. However, with careful planning and expert guidance, you can avoid many of the most common mistakes and enjoy a smooth transition. In this article, Benzinga explores the top 9 mistakes to avoid when rolling over your 401(k), along with some expert tips to help you navigate the process.

Mistake #1: Not Understanding Your Options

One of the biggest mistakes people make when rolling over their 401(k) is not fully understanding their options. You can choose from different types of retirement accounts, each with its own benefits and drawbacks. Before making decisions, take the time to research your options and consult with a financial advisor to determine which type of account is best for you.

>> There are free platforms for 401(k) rollovers to consider.

Mistake #2: Waiting Too Long

Another common mistake people make is waiting too long to roll over their 401(k). If you leave your money in your employer’s plan after you retire or leave your job, you may be subject to higher fees and limited investment options. It’s best to roll over your 401(k) as soon as possible to take advantage of the benefits of a new account.

Mistake #3: Not Checking Fees and Expenses

Fees and expenses are an important consideration when rolling over your 401(k). Some plans charge high fees for administration and management, which can eat into your retirement savings over time. Make sure to review the fees and expenses associated with a new account before making a decision.

Mistake #4: Not Considering Taxes

When you roll over your 401(k), you may be subject to taxes and penalties if you don’t follow the proper procedures. Make sure to consult a tax professional before making decisions to ensure that you’re fully informed of the tax implications of your choices.

Mistake #5: Forgetting About Loans and Withdrawals

If you have outstanding loans or have taken withdrawals from your 401(k), you may need to pay them back before you can roll over your plan. Make sure to check with your employer to determine what steps you need to take before rolling over your 401(k).

Mistake #6: Not Considering Investment Options

Retirement accounts offer different investment options, and it’s important to choose an account that aligns with your investment goals and risk tolerance. Make sure to review investment options offered by a new account before making a decision.

Mistake #7: Failing to Check for Employer Match

If your employer offers a match for your 401(k) contributions, make sure to check if you’re eligible to receive it before rolling over your plan. You don’t want to miss out on potential employer contributions to your retirement savings.

Mistake #8: Not Considering Your Overall Retirement Strategy

Rolling over your 401(k) is just one piece of your overall retirement strategy. Make sure to consider how this decision fits into your broader financial plan and retirement goals.

Mistake #9: Rushing the Process

One of the biggest mistakes you can make when rolling over your 401(k) is rushing the process. Take the time to consider your options, consult with a financial advisor and review fees and expenses associated with any new account. By relying on a measured and thoughtful approach, you can avoid common pitfalls and enjoy a smooth transition.

Rolling over your 401(k) can be a great way to take control of your retirement savings. Take the time to understand the process, compare your options and seek professional advice if needed. With the right approach, you can make a successful 401(k) rollover and set yourself up for a secure retirement.

Mistake #10: Trying to DIY a 401(k) Rollover

Although you can roll over your 401(k) yourself, the process is easier, simpler and financially safer when you turn to an expert. A company like Capitalize will make the process a breeze, and you’ll know that you didn’t leave out any important steps.

A DIY 401(k) rollover mistake could have negative consequences depending on the specifics of the situation. Here are a few potential mistakes and their implications:

1. Failure to complete the rollover within the allotted time: If you don't complete the rollover within the 60-day time frame allowed by the IRS, you may face taxes and penalties on the distribution. If you're under age 59 ½, you'll also face an additional 10% early withdrawal penalty.
2. Rollover to the wrong type of account: If you roll over your 401(k) to an account that is not qualified to receive the funds, such as a traditional IRA, you may face taxes and penalties on the distribution. Additionally, if you roll over to a Roth IRA instead of a traditional IRA, you may be subject to income taxes on the entire distribution.
3. Incorrectly calculating the amount to rollover: If you miscalculate the amount of your 401(k) distribution that should be rolled over, you may face taxes and penalties on any amount that is not rolled over. For example, if you mistakenly take a distribution that includes both pre-tax and after-tax contributions, and you only roll over the pre-tax portion, you'll owe taxes on the after-tax portion that was not rolled over.

When it comes to rolling over a 401(k), there are various factors to consider, including tax implications, investment options, and potential penalties. Working with reputable companies can provide peace of mind and ensure that the rollover process is handled correctly. Capitalize, for example, can also offer expert advice on investment strategies, help you navigate complex tax rules, and provide ongoing support to help you meet your retirement goals. By partnering with a trusted financial advisor, you can feel confident that you're making informed decisions about your retirement savings.