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5 Retirement Rollover Mistakes to Avoid

When you’re contemplating a career change, one of the most important decisions you’ll have to make is what to do with the retirement savings you’ve accumulated. If you contributed to a 401(k), 403(b) or a similar employer-sponsored plan, transferring it to another qualified account is the easiest way to take it with you. Rolling your account over is fairly straightforward but there are a few basic rules to keep in mind. Here are a few potentially costly rollover missteps you’ll want to avoid.

Find out now: How does my 401(k) work?

1. Missing the 60-Day Rollover Window

Rollovers can be completed directly or indirectly, depending on which option is offered by your employer. With a direct rollover, the money from your old retirement account is transferred straight to your new one. If you choose an indirect rollover, your plan administrator sends you a check which you must then deposit into the new retirement account.

To avoid taking a tax hit with an indirect rollover, the money has to be deposited within 60 days of being disbursed. If you miss the cutoff, the IRS characterizes it as a distribution for tax purposes. That means you’ll pay your regular income tax rate on all the money you took out. If you’re under age 59 1/2, you’ll also have to cough up an additional 10% penalty.

2. Forgetting About the Same Property Rule

When you’re rolling money from one retirement account to another, the guidelines specify the assets have to be the same going in as coming out. This means that if your account contains individual stocks or bonds you can’t sell them and use the cash to fund your new retirement account or vice versa. If you do so, the IRS considers it to be a taxable distribution and you may be subject to the 10% early withdrawal penalty.

3. Opting for an Indirect Rollover of an Employer-Sponsored Plan

If you’re rolling over a 401(k) or a similar plan it’s a good idea to always want to choose the direct rollover option if it’s available. When you request an indirect rollover, your employer is required by the IRS to withhold 20% of the balance for taxes even if you’re planning to complete the transfer within 60 days. You also have to replace the amount that was withheld when you finalize the rollover; otherwise, the IRS treats it as a taxable event. Choosing a direct rollover instead simplifies the process and allows you to sidestep a double tax whammy.

What to Do With Your 401(k) When Switching Jobs

4. Rolling Over at the Wrong Time

Once you turn 55, different rules take effect that impact your ability to take money out of your 401(k). If you leave your job and your retirement account stays with your employer you can still take distributions without paying the 10% early withdrawal penalty. When you roll the money over into an IRA or another qualified plan, you lose this advantage.

Waiting too long to roll your retirement assets over is also problematic. Certain types of plans require you to take minimum distributions once you reach age 70 1/2. Once this rule kicks in, these funds are no longer eligible for a rollover. Any rollovers of required minimum distributions are treated as excess contributions for tax purposes, which could potentially raise your tax bill.

5. Choosing the Wrong Rollover Account

The IRS has specific guidelines about what types of retirement accounts you can roll your assets into. Before you try to initiate a rollover you need to make sure the type of account you’ve chosen is eligible to receive the funds. For instance, you can roll a traditional IRA into a Roth IRA but not the other way around. You also want to pay attention to the fees that each type of account carries, both for the rollover itself and ongoing maintenance.

The Bottom Line

Moving your retirement assets from one place to another doesn’t have to be a hassle and the more you understand about how the process works, the better. Taking the time to plan your rollover ensures that your nest egg doesn’t take an expensive hit.

If you’re overwhelmed or have any lingering questions, you can always turn to a financial professional for assistance. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three registered investment advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Photo Credit: flickr

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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