Changing jobs can be exciting. A new office, new projects, and maybe even a raise. But if you have a 401(k) from a previous job, you also need to make some smart decisions about your retirement savings. Ignoring the rules around 401(k) rollovers can potentially cost you thousands in taxes, penalties, or missed growth opportunities.
7 Costly Rollover Mistakes To Avoid
Mistake #1: Cashing Out Too Soon
It might be tempting to withdraw your old 401(k) and put it in your checking account, especially if you’re juggling bills or planning a big purchase. But taking money out early usually means:
- Income taxes: Your withdrawal counts as taxable income.
- Early withdrawal penalty: If you’re under 59½, the IRS hits you with an additional 10% penalty.
Withdrawing money not only costs you in taxes and penalties, but it also prevents your savings from growing and compounding over time.
Instead, consider keeping your savings invested. Rolling it over into your new employer’s 401(k) or an IRA keeps your retirement money working for you and avoids unnecessary taxes and penalties.
Mistake #2: Missing the 60-Day Rollover Window
If you receive a check from your old 401(k) and want to deposit it into a new retirement account, you have 60 days to complete the rollover.
Failing to do this means the IRS treats it as a withdrawal, which could cost you both taxes and penalties.
Pro tip: Many people skip the hassle by asking their old plan to do a direct rollover into a new 401(k) or IRA. That way, the money never touches your hands, and you don’t have to worry about the 60-day clock. PensionBee can help guide you through this process to make sure your rollover is smooth and straightforward.
Mistake #3: Not Checking Your Vesting Schedule
Before you roll over your old 401(k), take a close look at your vesting schedule. It determines how much of your employer’s contributions you actually get to keep if you leave your job.
Here’s how it works:
- Your contributions are always 100% yours.
- Employer contributions (the match) may only become fully yours after you’ve worked a certain number of years.
For example, if your plan has a five-year vesting schedule and you leave after three years, you might only keep a portion of your employer’s match, while the rest stays with the company.
Knowing your vesting schedule before you leave can help you decide whether it’s worth staying a bit longer or rolling over your balance right away. It also helps ensure you know exactly how much money will move with you into your next 401(k) or IRA.
Mistake #4: Not Considering Investment Options
Every 401(k) plan comes with its own set of investment choices. Some give you plenty of affordable options, while others can be more limited or cost more to manage.
When rolling over your 401(k), take a look at your new options:
- Are the funds diversified?
- What are the fees?
- Does the plan offer target-date funds or other hands-off options?
If an IRA offers better investment options or lower fees than your employer’s 401(k), it may make sense to roll your old 401(k)s from previous jobs into an IRA rather than your new employer’s plan.
