401k / IRA Rollover Tips: 3 mistakes to avoid

mistakeRolling over a 401k or IRA is pretty easy. But if you make a mistake it can cost you.

2 Important Details:

  • There are NO tax consequences in doing a rollover. You can rollover your old 401k plan into your own self directed IRA and there will be NO taxes due. This is a good thing.
  • You can do PARTIAL rollovers to different places. For example. Half your money could go to Fidelity for trading stocks and mutual funds and half could go into a Retirement Income Annuity to give you steady income during retirement.

MISTAKE #1: Choosing the wrong custodian

Here is the most important financial question ever invented.

“What’s the purpose of the money?”

Answer this question first, and that will help you to find the right institution (custodian) to roll your money to. There are 3 main custodians.

1) Brokerage/Investment Company – This would be a place like Fidelity or Merrill Lynch. You will have access to Mutual Funds, Stocks, ETF’s, Bonds, Variable Annuities and other securities.

If the purpose of the rollover is to GROW the money over the long term and you are willing to accept RISK, then a brokerage house is probably the right place for your rollover. They will give you lots of options to GROW your money.

2) Banks – Some banks offer investment services but most people roll their 401k to a bank because they are really conservative and just want the money in Bank CD’s or other Bank Accounts.

If the purpose of the money is to keep it really safe and liquid, with FDIC insurance, then a bank would probably be a good place for your rollover.

3) Insurance Companies – Insurance Companies offer different types of annuity contracts. These are designed to keep your money safe and provide you with a  predictable income to supplement your Social Security. However, there are some limits on your liquidity with annuities.

If the purpose of the rollover is to preserve it, and set up some additional income to supplement your Social Security in retirement, then an insurance company is probably the right place for your rollover.

Mistake #2: Not following the transfer rules

The best way to roll over your 401k to a self directed IRA is to do a CUSTODIAN TO CUSTODIAN transfer. This avoids any potential tax problems.

The new company will have transfer paperwork for you to fill out. Then their back office goes about getting the money from your 401k provider. You don’t really have to do much. Just let them do the work. The process may take a month or so. This is the cleanest way to do a rollover and is recommended if it’s an option.

The 2nd best way would be for your 401k company to issue a check. Important: The wording on the check should be something like this. (Your new IRA custodian will give you the  exact wording)

  • Check payable to : “ABC IRA Company, FBO: (Your Name) / (IRA account number)

The worst option to do a rollover is to have the 401k company issue you a check payable to you, in your name. This can still work, but you only have 60 days to get the check deposited into an IRA Rollover account and there may be some tax withholding. Plus, if you don’t do things correctly and on time, the TAX MAN will come and you will owe taxes on the entire distribution.

Mistake # 3: Choosing the wrong investments for your purpose

This goes back to the question, “What is the purpose of the money?”

If you try an fit a square peg in a round hole, you get frustrated.

Here a couple simple ways to think about it.

LONG TERM GROWTH WITH RISK: Mutual Funds, stocks, variable annuities, ETF’s

LIQUIDITY and FDIC INSURANCE: Bank Accounts (CD’s etc)

SAFETY and INCOME: Retirement Income Annuities

For an article “What’s the best way to get income from your IRA or 401k” Click Here

Like what you see here? Then join the IRA tip subscription list and get helpful IRA tips every Thursday. NO SPAM though. We hate it too. 

[contact-form-7 id=”362″ title=”Email Capture”]

Warmest Regards,

Carl Ostenson

P.S. The happiest and most secure people I meet in retirement have ALL 3 types of accounts. They have money at the bank for short term cash needs. They have money in the stock market to fight inflation and they have money in annuities to guarantee them income for as long as they live.

Think of your money like a STOOL. A one or two legged stool isn’t very secure. But once you add the THIRD leg it becomes very secure. So the 3 legs of a secure retirement would 1) BANK 2) INVESTMENT 3) ANNUITIES


Speak Your Mind