One of the most critical financial events that you will one day experience is your 401(k) rollover.
Why do I say it is “critical,” I mean that seems a bit dramatic doesn’t it?
Well, not exactly.
When you rollover your 401(k) into an IRA you want to make sure you don’t make any mistakes. If you do something incorrectly, it could cost you big in loss of tax deferral and potentially fees depending on your age.
Here’s what I mean, if you cash out your 401(k) it will all count as income for you in that tax year. This could push you into a higher marginal tax bracket.
Or if you have your 401(k) check made out to you with the intentions of putting it into an IRA, you could still be in trouble. You have 60 days to deposit the funds into an IRA. If you miss that deadline it will count as a distribution, with any taxes or fees that come with it.
And if you are under age 55 you will almost certainly pay the 10% penalty to the IRS for early withdrawal. If you are between 55 and 59 ½ you may not have to pay the 10% penalty depending on whether the 401(k) you withdrew from was at an employer from whom you quit working after the age of 55.
The details can get a little complicated.
So here are 5 myths about 401(k) rollovers. If you think these are true you could end up making a big mistake with your retirement savings.
1. 401(k) Rollovers Have Hidden Fees
There is no fee to do a 401(k) rollover. There may be a fee or commission if you work with a financial advisor. But the act of rolling over your 401(k) itself is a no cost action.
2. You Can’t Rollover Your 401(k) Into An IRA If You Make Too Much
Again, this is just not true. You may not be able to contribute to a Roth IRA if you make too much money. And you may not be able to deduct your contributions to a pre-tax traditional IRA if you make too much money.
But rolling over a 401(k) into an IRA is not a problem regardless of how much you make. And the IRA contribution limits do not apply to rollovers.
3. You Must Cash Out Your 401(k) When You Leave Your Employer
This too is not true, in most cases. Former employers will let you keep your 401(k) funds in their plan if the balance is over $5,000. If the balance is between $1,000 and $5,000 they can roll it into your own IRA.
4. You Must Already Have An IRA Or You Can’t Do A 401(k) Rollover
This is also not true. Before you do a 401(k) rollover you need to open up an IRA account. It can be a brand new IRA account. It doesn’t have to be an account that you’ve had for years.
Once the IRA account is open, you can tell your 401(k) plan that you would like the funds rolled into it. And you will even have the new account number to give to your 401(k) plan so they will know which IRA account it is going to.
5.When You Rollover Your 401(k) You Lose The Portion Your Employer Matched
This is another myth. As long as you are vested you will receive the matching contributions that your employer gave you. It’s your money.
Some companies require you to work with them for 1 year before their matching contributions are vested. Check with your plan to make sure you are vested. Your own contributions are yours from day 1.
I hope that helps dispel some myths that could potentially cause you to make a mistake with your 401(k) rollover.
And to make sure you go through all the right steps (in the right order) before you attempt to rollover your 401(k), be sure to download my free e-checklist “401(k) Rollover 10-Point Checklist For Baby Boomers.”
It will go over the essential steps in a 401(k) rollover. And it should help you avoid any mistakes during this critical event.