401k Rollover Answers

It’s a hectic time, leaving a job. If you are leaving by your own decision, then your head is probably filled with the excitement of the new job you’ve lined up. If, as with many people lately, you’re not leaving the job of your own volition, then your head is filled with panic and fear. In either case the last thing you’re thinking about is preserving the cash in your current 401k.

Here are some common mistakes people make when they’re executing a rollover.

1. Not doing a rollover. By far, this is the most common mistake and it’s perhaps the biggest one you can make. You decide to simply cash out the account. You figure a rollover 401k situation isn’t worth it because there’s only X amount of money in the account. But do you know the 401k rules? You will be taxed on the money and incur a 10% penalty on top of that. Sure, you need the money right now and can have most of your money in hand, but if at all possible, it should be sitting somewhere, quietly growing and waiting for your retirement.
2. Blindly following the advice of friends or your boss. They usually are not financial counselors. They might be doing fine with their own money, but this is your money. Only you can decide what best to do with it and how to make it serve you. Everyone’s financial situation is different, so there is no cookie-cutter solution that guarantees a successful financial outcome. Even the most skilled financial planners sometimes get it wrong. So if your best friend tells you that a 401k rollover to IRA is the best plan, you should do a little research before you sign the papers.
3. Not paying back any outstanding loans against your 401k before the last day of work. Admittedly if you aren’t the one choosing to leave, there isn’t much you could do about this. However, it’s surprising the number of people who have forgotten that they had a loan against the 401k. Most companies give you 60 days to pay back the loan once you leave the job. If you can’t do it and you default, the full amount of the loan will show up as taxable income on your tax bill. The easiest way to avoid this sticky situation? Never, ever take out a loan against your 401k.
4. Not doing basic research about 401k rollovers. The internet is full of (mostly) sound information about your 401k rollover options. It is a good idea to be armed with the facts and know your options when faced with a decision that affects your money. Your banker or a stock broker could also be a good source of information, or try a financial planner.  One important caveat: Pay attention to the people who you feel are teaching you about retirement, rather than strictly selling you a product. If your financial planner stands to make a huge commission in selling you a variable annuity or a high-load fund, chances are his advice may not have your best interest in mind.
5. Not realizing that you have 60 days to change your mind about what you just did with your 401k rollover. If you took the distribution and you’re just reading this now, you might have time to move the money into an IRA or other retirement account without any penalties.

The world of personal finance can seem like a twisty, trap-laden path, and right after leaving a job is a tough time to be making decisions that may have long-lasting consequences. It’s a goof idea to familiarize oneself with the options available ahead of time, when emotions may not play too much of a role in the decision-making process.