Avoid these 401(k) mistakes at all costs

3 Mistakes to Avoid When Starting a Retirement Plan

Avoid these 401(k) mistakes at all costs

Don't make these common mistakes when setting up your company retirement plan. We work with businesses every day who have told us they wish they had known these key tips before getting started. Take a look at the three common mistakes to avoid below.

There are several plan types to choose from when starting a retirement plan—401(k), SEP IRA, SIMPLE IRA— but they aren’t all created equal.

Selecting the right plan type for your business can significantly affect your ability to save for retirement, which is why choosing the wrong plan type is the most common mistake business owners make when starting a retirement plan.

Most of the time a 401(k) is the plan type that makes the most sense, because a 401(k) offers maximum tax advantages as well as maximum flexibility. However, many business owners open SEP or SIMPLE IRAs instead, and regret it. See below for a list of drawbacks when it comes to SEP and SIMPLE IRAs:

SEP IRA Drawbacks: 

  1. Employer contributions are required on an annual basis, and must be made pro-rata. This means you may be required to give your employees up to 25% of their income annually in the SEP IRA.
  2. Employees aren’t able to contribute their own money to the plan
  3. All employees must be included, including part time and seasonal employees
  4. All contributions are immediately vested 

SIMPLE IRA Drawbacks:

  1. The maximum annual contribution is only $13,500 (significantly lower than a 401(k) plan), which is rarely enough to help business owners save for retirement or help with tax mitigation 
  2. Employer contributions are required on an annual basis (3% match or 2% non-elective), making this plan relatively costly when compared to its limited tax benefit
  3. All employees must be included, including part time and seasonal employees
  4. All contributions are immediately vested 
  5. SIMPLE IRAs have very strict rules about when they can be upgraded to a 401(k), it must be done in Q4 before November 1st. This often causes business owners to be trapped in their SIMPLE IRA for years, which can severely limit their ability to save. 

We’ve made it easy to find out which plan type may be best for your business with our Plan Selector Tool. 

2. Not Hiring a Specialized Adviser

Business owners have options when it comes to hiring an adviser for the retirement plan.

Depending on who you hire, you’ll find the amount of time you have to spend on plan administration can change dramatically, in addition, each adviser provides different options when it comes to investments and fees.

These differences can add up to significant financial impact, which is why choosing a generalist (or no adviser) instead of a specialist is the 2nd common mistake business owners make when starting a retirement plan.

There are 3 options when it comes to hiring an adviser:

  1. No adviser—Start a plan without an adviser. This option means the business owner is on their own when it comes to implementing plan responsibilities, including choosing investment options. This may seem a low cost option, but fund fees, fund performance, and extra administrative work can make this option much more costly than it seems. 
  2. Non-specialist adviser—Start a plan with an adviser who doesn’t specialize in retirement plans. In this scenario, the adviser might help with some education or investment services, but the bulk of the plan responsibilities still fall to the business owner 
  3. Specialist adviser—Start a plan with a specialized adviser who has dedicated expertise in retirement plans, and will help the plan connect with other providers as necessary. In this scenario, the business owner is able to delegate most of the plan responsibilities to the plan providers. 

Often times business owners who work with a non-specialized adviser (or no adviser at all) end up feeling overwhelmed by the retirement plan.

This is especially true for small businesses who don’t have an HR department, leaving all the responsibility to the business owner.

The easiest way to avoid this mistake is to know your options, and consider a retirement plan adviser that helps you to delegate plan responsibilities. 

3. Waiting Too Long

The 3rd common mistake business owners make when starting a retirement plan is waiting too long to start.

Too often business owners put off the decision to start a retirement plan, and then end up kicking themselves, wishing they had started saving sooner. If this sounds you, there is good news.

The SECURE Act (legislation passed in Dec 2019) makes it easier and more affordable than ever to start a retirement plan now. See below for information on why now is the best time to start a retirement plan.

Tax Credit:

If you’ve ever wondered when is the best time to start a retirement plan, the answer is right now! This is because there is a new tax credit available (as of 2020) for businesses starting a retirement plan. The tax credit is applicable for the first 3 years of the plan, and can be as high as $16,500.

It’s not a tax deduction, it’s a bona fide tax credit, which means actual money in your pocket. This provision makes it easier than ever for business owners to avoid the mistake of waiting too long to start a retirement plan.

  Here is a quick summary of how it works below, to learn more about the tax credit, check out our Tax Credit FAQs:

  1. The annual tax credit will be the greater of $500, OR $250 for every eligible NHCE
  2. The annual tax credit may not exceed $5,000 or 50% of total eligible plan costs 
  3. Plans that add automatic enrollment get a bonus tax credit of an additional $500 per year

401(k) Deadline Extension: 

Prior to 2020, many business owners would wait until tax time to consider starting a retirement plan. This was problematic because historically 401(k) plans couldn’t be started after the calendar year had ended.

This forced many business owners to start SEP IRAs or SIMPLE IRAs instead of a 401(k) plan, even though a 401(k) may have been the better suited plan type.

The good news is, the SECURE Act extended the deadline to start a 401(k) plan, which means now a 401(k) plan can be started after the calendar year ends, so long as it’s done prior to the tax filing deadline (including extension). This is great news for business owners because it makes it possible to start a 401(k) plan for the prior calendar year!

Deadline to start a 401(k)

Now you know the 3 most common mistakes business owners make when starting a retirement plan. 

© 2021 Fisher Investments. Fisher Investments 401(k) Solutions offers fiduciary and consulting services, including participant education, to company-sponsored 401(k) plans. Investing in securities involves the risk of loss. Glossary | Privacy | Sitemap

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Avoid These Costly Money Mistakes when Rolling Over a 401(k) to an IRA

Avoid these 401(k) mistakes at all costs

As we kick off 2021 and you begin thinking about money moves you want to make this year, we want to provide you with some insights on a common rollover and some costly mistakes associated with it. 

First, we want to distinguish the rules that differ between 401k plans and IRA’s. If the rollover process is done incorrectly, it could be considered a distribution, which would make it subject to taxation and, possibly, an early withdrawal penalty. If you’re not careful, you could make costly errors or lock yourself into a move that can’t be easily undone.

Both 401(k) plans and IRAs have the common purpose of letting you put away tax-advantaged money savings for retirement. However, there are some rules that differ between the two. Even the rollover process itself can come with snags if you’re not careful.

Here are some things to be aware of before initiating a rollover. These apply to traditional 401(k) plans and IRAs, whose contributions are generally made pre-tax.

The rollover process

Once you’ve decided to move your retirement money to an IRA, it’s best to avoid receiving a check made out directly to you from the 401(k) plan, even if it is sent to you.

Assuming you have the rollover account set up and ready to receive the funds from the 401(k), the check should be made out to the IRA custodian or the benefit of you. In this case, there is no tax withholding.

If the check is payable to you, though, it is initially considered a distribution. That means your 401(k) plan is required to withhold 20% for taxes.

Otherwise, that withheld amount is considered a distribution and potentially subject to an early withdrawal penalty if you are younger than age 59½.  You have 60 days from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA.

The IRS may waive the 60-day rollover requirement in certain situations if you missed the deadline because of circumstances beyond your control.

Next, make sure you are specifying that you want to do a direct rollover. Some retirement savers hold company stock in their 401(k) alongside other investments. In that situation, if you roll over all those assets to an IRA, you lose the potential to get a more favorable tax treatment on any growth those shares had while in your 401(k).

It gets a bit confusing, but the idea is that if the company stock has unrealized gains, you transfer it to a brokerage account instead of rolling the money over to the IRA along with your other 401(k) assets. Upon transferring, you are taxed on the cost basis (the value of the stock when you first acquired it in your 401(k).

However, when you then sell the shares from your brokerage account — whether immediately or down the road — any growth the stock experienced inside the 401(k) would be taxed at long-term capital gains rates (0%, 15% or 20%, depending on the rest of your income). This could be less than the ordinary-income tax treatment you’d face if the stock went into a rollover IRA and then were withdrawn.

The rule of 55

If you leave your job at age 55 or older and want to access your 401(k) money, the Rule of 55 allows you to do so without penalty. Whether you’ve been laid off, fired or simply quit doesn’t matter—only the timing does.

Per the IRS rule, you must leave your employer in the calendar year you turn 55 or later to get a penalty-free distribution. (The rule kicks in at age 50 for public safety workers, such as firefighters, air traffic controllers and police officers.

) So, for example, if you lost your job before the eligible age, you would not be able to withdraw from that employer’s 401(k) early; you’d need to wait until you turned 59½.

It’s also important to remember that while you can avoid the 10% penalty, the rule doesn’t free you from your IRS obligations. Distributions from your 401(k) are considered income and are subject to federal taxes.

What spouses should know

If you are the spouse of someone who plans to roll over their 401(k) balance to an IRA, be aware that you’d lose the right to be the sole heir of that money. With the workplace plan, the beneficiary must be you, the spouse, unless you sign a waiver. Once the money lands in the rollover IRA, the account owner can name any beneficiary they want without their spouse’s consent.

Here’s another potential misstep: Making a withdrawal from your 401(k) to give to your ex-spouse as dictated in a divorce agreement. That won’t work — the money will be considered a distribution to you, subject to taxation, as well as potentially a penalty if you’re under age 59½. 

In a divorce, retirement assets that are awarded to the ex-spouse can only be distributed penalty-free via a qualified domestic relations order, or QDRO. That document is separate from the divorce decree and must be approved by a judge.

When rolling over money to an IRA, there are many steps and factors to think about. In many instances, it may be best to consider seeking the guidance of a financial professional. If you find yourself in this situation, we would be happy to help and walk you through your rollover. To inquire more, schedule a free 30-minute consultation on our site. 

Источник: https://shermanwealth.com/avoid-these-costly-money-mistakes-when-rolling-over-a-401k-to-an-ira/

Three common 401(k) mistakes that could cost you thousands

Avoid these 401(k) mistakes at all costs

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The 401(k) is one of the most powerful retirement tools out there, so if you're lucky enough to have access to one, take advantage of it.

As of 2019, you can contribute up to $19,000 per year to your 401(k), which is more than three times the annual amount you can save in a traditional or Roth IRA.

Many employers also offer matching 401(k) contributions, which are essentially free money.

But even if you're contributing a portion of each paycheck to your 401(k), there are still a few mistakes that could be detrimental to your retirement savings.

Your 401(k) can help you build a healthy nest egg, but only if you use it strategically. By avoiding these common missteps, you can make the most of every dollar and save even more for retirement.

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1. Paying too much in fees

Everyone pays fees when they invest in a retirement account (whether it's a 401(k) or other type of plan), but not everyone fully understands what they're paying.

Nearly four in 10 Americans (incorrectly) believe they're not paying any 401(k) fees at all, according to a survey from TD Ameritrade, and another 22% aren't sure if they're paying fees or not.

Even if you are aware you're paying fees, exactly how much those fees are costing you could come as a surprise.

The average U.S. worker paying a fee of 1% of total assets managed can expect to pay roughly $138,000 in fees alone over a lifetime, a report from the Center for American Progress found.

As if that number isn't shocking enough, if that same worker were paying an annual fee of 1.3% instead, the total lifetime fees would jump to around $166,000.

So, even though paying just a fraction of a percent more in fees may seem it wouldn't make a noticeable difference, in reality, it could cost you tens of thousands of dollars over time.

To figure out what you're paying in fees, you can either comb through your 401(k) statements or talk to your plan administrator. The average 401(k) plan charges around 1% in total fees, according to the Center for American Progress, so if you're paying more than that, it might be worthwhile to look into other options.

Even if you find you are overpaying in fees, keep contributing enough to earn the full employer match. Free money is still worth more than any fees you might be paying. Then after you've maxed out the employer match, check out a few IRA options to see if you could be paying less by investing elsewhere.

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2. Not contributing enough to earn the full employer match

You know that it's important to earn the full match, if your employer offers one. If you don't contribute at least that much, you're missing out on free money. However, you may not realize just how much of an impact it can have on your total savings.

For example, say you're earning $60,000 per year and your employer will match your 401(k) contributions up to 3% of your salary, or $1,800 per year.

Let's also say you're currently contributing $1,000 per year, which your employer matches, and you're earning a 7% annual rate of return on your investments.

Here's what your total savings would look over the years if you were to continue saving at that rate versus if you had increased your contributions to earn the full employer match:

In this scenario, contributing an additional $800 per year (or around $67 per month) to your 401(k) and earning the full employer match can result in nearly doubling your overall savings.

The difference can be even more dramatic as you earn pay raises, too. As your salary increases, so does the dollar amount your employer will match. So, if you're still not saving enough to earn the full match, you're potentially missing out on even more free money.

When you leave a job, you have a few options when deciding what to do with the money in your 401(k): You can leave it alone and simply let your savings grow, you can roll the money over to an IRA, or you can cash it out and withdraw all the funds. If you choose the third option, you could be hurting your savings more than you think.

There are several consequences to withdrawing your retirement savings when you switch jobs. First, you'll ly be subject to a 10% penalty fee as well as income taxes on the amount you withdraw if you're under age 59 1/2. Second, withdrawing your money – even if you stick it in a savings account – can cause you to miss out on long-term growth. 

Say the money in your 401(k) was earning a 7% annual rate of return. If you withdraw your cash and throw it in a savings account, you may only be earning a 1% or 2% return on your savings.

Even if you reinvest it later in a new 401(k) or IRA, the time your money sat in a savings account is time that it wasn't reaching its full potential.

Depending on how much money you withdrew and how long it was in a savings or checking account rather than another retirement account, you could be missing out on thousands of dollars in potential earnings.

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The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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401(k) Mistakes to Avoid

Avoid these 401(k) mistakes at all costs

Fees and penalties for your 401(k) can often be avoided if you understand how your 401(k) plan works. You can also take advantage of employer contributions and tax breaks once you figure out how to qualify.

Take care to avoid these 401(k) mistakes:

  • A low default savings rate.
  • Missing out on the 401(k) match.
  • Failing to maximize tax breaks.
  • Automatically accepting the default investment.
  • Paying excessive 401(k) fees.
  • Leaving the company before you are vested.
  • Triggering the 401(k) early withdrawal penalty.
  • Initiating a 401(k) loan.
  • Forgetting to take 401(k) distributions in retirement.
  • Ignoring old 401(k) plans.

Here's how to fix several common 401(k) problems.

Load Error

A Low Default Savings Rate

Many employees are automatically enrolled in a 401(k) plan, typically at the default savings rate of 3%. But sticking with this low savings rate could be a mistake.

“That 3% is not enough,” says Shannon Nutter-Wiersbitzky, head of participant strategy and development at Vanguard. “If a younger person could start at the 12% rate, they are certainly going to benefit tremendously from the benefit of compounding over time.”

If you can't save that much at the beginning of your career, aim to increase contributions each year.

“It's typical that you would start at potentially a lower percentage and then increase that over time,” Nutter-Wiersbitzky says.

“If you generally get your raise at the end of the year, set your 401(k) to automatically increase. You won't feel it as much in terms of what is being saved for you your pay.”

Missing Out on the 401(k) Match

Find out if your employer provides a 401(k) match, and make sure you save enough to qualify for the maximum possible match. One common 401(k) match formula is 50 cents per dollar saved up to 6% of pay. In this case you would need to save at least 6% of your salary in order to claim the full match.

“A 401(k) match anywhere from 4% to 6% of pay is typical,” says Gregg Levinson, a senior retirement consultant for Willis Towers Watson. “It might require 8% deferral (of your pay) to get the full 4% (match).”

Failing to Maximize Tax Breaks

Workers defer paying income tax on the money they contribute to a traditional 401(k) plan. Participants can delay paying taxes on up to $19,500 in 2020. Those age 50 and older can make catch-up contributions of up to an additional $6,500. A 55-year-old in the 24% tax bracket could reduce his income tax bill by $6,240 if he maxes out his 401(k) plan.

“There is a big tax advantage if you contribute to the max allowed,” says Lavina Nagar, a certified financial planner and president of Maya Advisors in Palo Alto, California. “If you can stretch yourself and save the full $19,500, that is the ideal situation.” Income tax won't be due on the money in your traditional 401(k) plan until it is distributed from the account.

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Automatically Accepting the Default Investment

Workers who are automatically enrolled in a 401(k) plan are invested in a default fund selected by the plan sponsor.

The most common default investment is a target-date fund, which typically contains a mix of stocks, bonds and cash that grows more conservative over time.

However, the fees, underlying investments and rate at which the fund grows more conservative won't be an ideal fit for all employees. Take a look at the other investment options in your 401(k) plan before sticking with a target-date fund.

Paying Excessive 401(k) Fees

While some 401(k) plans negotiate for low costs on behalf of their employees, others are riddled with expensive funds and excessive fees.

However, you can move your money to lower-cost funds within your 401(k) plan.

Your 401(k) plan is required to send each participant an annual 401(k) fee disclosure statement that lists how much each fund in the 401(k) plan costs to own in a single chart.

“There are disclosures that have to come with those investments that detail the fees,” says John Scott, director of the The Pew Charitable Trust's retirement savings project.

“You should be able to get that information from your human resources person or the plan service provider or the mutual fund provider.

” Check this document each year to see if there are lower-cost funds in the 401(k) plan that will meet your investment needs.

Leaving the Company Before You are Vested

You don't get to keep employer contributions to your 401(k) until you are vested in the account. Some 401(k) plans immediately vest company deposits, while others require several years of job tenure before you can keep any of the 401(k) match.

There are also graduated vesting schedules that permit employees to keep a portion of the 401(k) match their years of service at the company, and some employers require five or six years on the job before employees qualify for the entire 401(k) match.

“Vesting can be immediate or vesting can stretch over a period of time,” Nagar says. “If you move you might leave something on the table, and that should be part of your negotiation for the new job.”

Triggering the 401(k) Early Withdrawal Penalty

Cashing out your 401(k) plan before age 59 1/2 (or in some cases age 55) will typically trigger a 10% early withdrawal penalty in addition to the income tax you will owe on the distribution.

A $5,000 withdrawal at age 50 will result in a $500 early withdrawal penalty and another $1,200 in income tax for someone in the 24% tax bracket.

However, 401(k) participants who have been impacted by coronavirus costs are eligible to take penalty-free emergency withdrawals in 2020 and can pay the income tax over three years.

Initiating a 401(k) Loan

If you need access to your savings before retirement, account owners are typically allowed to take a 401(k) loan of as much as 50% of the vested account balance up to $50,000.

The CARES Act temporarily increases the 401(k) loan limits to 100% of the vested account balance up to $100,000 for account owners facing coronavirus costs. Loans generally must be paid back with interest within five years.

However, 401(k) loans charge a variety of fees, and you miss out on the investment gains you could have earned in the account.

“It should be a last resort because the interest isn't deductible and you're tapping into a retirement asset,” says David Clarken, a certified financial planner for FWI Wealth Management in Atlanta.

If you leave your job, the loan balance must be paid back by the due date of your federal income tax return. Loans that aren't repaid on time are considered distributions, and taxes and penalties may apply.

Forgetting to Take 401(k) Distributions in Retirement

Withdrawals from your 401(k) are typically required after age 72. The penalty for missing a required distribution is 50% of the amount that should have been withdrawn.

But you don't need to wait until age 72 to take retirement account distributions. Some retirees start withdrawals during their 60s, which allows you to space out the tax bill and in some cases pay a lower tax rate.

Retirees will be allowed to skip their 2020 required minimum distributions due to provisions of the CARES Act.

Ignoring Old 401(k) Plans

When you change jobs, you can generally leave your retirement account balance in the 401(k) plan. You might want to maintain a 401(k) plan with a former employer if the plan has especially good investment options, low costs or contains company stock.

However, if you have multiple 401(k) plans at several former employers, you can simplify your financial life by consolidating accounts. Some workers open an IRA and roll their 401(k) balance into it each time they change jobs. Moving your money to an IRA maintains the tax benefits while also giving you a wider range of investment options.

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10 Costly 401(k) Rollover Mistakes To Avoid Now

Avoid these 401(k) mistakes at all costs

A 401(K) rollover doesn't have to stressfull. Here are ten 401(k) Rollover mistakes you need to … [+] avoid.


Mistakes when rolling over your old 401(k) can be quite costly and annoying. Sadly, these mistakes are also quite common. On a happier note, these 401(k) rollover mistakes are easy to avoid.

First off, not all assets in your 401(k) can or should be rolled into an IRA. Ignoring this can cause expensive tax problems or lead you to miss some tax minimizing financial planning opportunities.

A failed rollover may cause the entire balance to be distributed, which may make the withdrawal fully taxable. Depending on your age, you may also get hit with a 10% early withdrawal penalty.


Here are ten examples of 401(k) mistakes that everyone reading this will want to avoid.

1.Miscoding an IRA Rollover

I just helped a new client clean up a rollover that was miscoded as a withdrawal. If this mistake had not been caught, the client would have been hit will a several hundred-thousand-dollar tax bill, plus more than $100,000 in early withdrawal fees.

Because the 401(k) proceeds were rolled into an IRA, there would ly have been future IRS issues if this mistake wasn't caught early enough to have the 1099-R tax form amended and get the money withheld for taxes and penalties credited back and rolled over properly.

This new client originally called because he wanted help figuring out why he was charged a fee of more than $400,000 to rollover his 401(k).

After speaking with a representative at his 401(k) provider, we discovered that the rollover had been miscoded.

 Simply checking the wrong, small box on a computer screen (by the 401(k) service rep, BTW) could have drastically changed this person's retirement.

Cashing your out your 401(k) instead of rolling it over is a mistake flushing cash down the … [+] toilet.


2. Withdrawing Your 401(k) Instead of Rolling It Over

For those struggling financially during the Coronavirus Pandemic, it may be tempting to raid your retirement accounts to pay bills. Doing so could have terrible repercussions for your future retirement security. Also, you will get hit with taxes and early withdrawal penalties.

Don't get me started on taking money from a 401(k) in order to take a trip or buy a car.

3. Losing Your Old 401(k)

You may think this one is crazy, but it is easier to do than you think. Americans lost track of more than $7.7 billion worth of retirement savings in 2015 alone by “accidentally and unknowingly” abandoning their 401(k)s.

We all are busy, and it's easy to see how some could forget where their old 401(k)s are held. Sometimes the company is sold; maybe you moved and forgot to update your address with the 401(K) plan administrator. For this reason, I'm a fan of consolidating old retirement accounts, if for no other reason than to make your life easier and the account easier to track.

MORE FROM FORBESRetirement Contribution Limits Announced For 2021 By IRSBy David Rae

4. Rolling Over Your 401(k) to An Annuity

I hate when I see people attempting to rollover their IRAs or 401(k)s, with low fee investment options, into annuities with a crazy array of hidden fees. Not all annuities are bad, but make sure you are buying for the right reasons.

Whenever possible, work with a fiduciary financial planner, so you know he or she isn't recommending an annuity just to get a big commission or keep their employer-based health insurance.

(Some salespeople are required to sell a certain amount of their company's products to get their health insurance paid for.)

5. Required Minimum Distributions and Rollovers

Regardless of where you are in the calendar year, required minimum distributions (RMD) can never be rolled over. It is common for people to make this 401(k)-rollover mistake.

In the event an RMD is rolled over, it will become an excess IRA contribution subject to the 6% penalty unless it is removed by October 15 of the year following the year of the excess contribution.

Usually, you will find out you made this mistake when you receive a wonderful tax notice from the IRS, and nobody wants to receive that.

MORE FROM FORBESWhat Should I Do With My Old 401(k)?By David Rae

6. 401(k) Rollover of After-Tax Funds

If you have after-tax IRA funds in your 401(k), they cannot be rolled over to a new company plan. Only pre-tax IRA funds can be rolled over. This rule is actually to your advantage because it allows you to isolate the cost basis of the after-tax funds in the IRA. Typically, you can roll this portion of the 401(k) over to a Roth IRA.  

7. Plan Loans — Deemed 401(k) Distributions

When you leave your employer, it is common to stop making payments towards a 401(k) loan. Eventually, this loan balance will be deemed a distribution.

A deemed 401(k) distribution is taxable and may be subject to the 10% early distribution penalty (for those not yet 59.5 years of age).

The deemed distribution amount, or loan balance, is not eligible to be rolled over to an IRA, even if the employee has the funds to complete the rollover.

8. 72(t) Distributions From A 401(k)

72(t) is a retirement income strategy designed to avoid the 10% early withdrawal penalty. It is useful for those retiring before 59.5 years of age.

In order to qualify for the early withdrawal penalty exception, the 72(t) withdrawals must be a series of substantially equal periodic payments.

Generally speaking, you can tap your IRA or 401(k) (assuming you are no longer working for the company) before 59½ without a 10% penalty if you commit to a plan of withdrawals according to the rules set out in Section 72(t)(2)(A)(iv) of the Internal Revenue Service code.

Technically you can begin a 72(t) payment schedule from an IRA at any age, even if you are still working. The 72(t) retirement income payments must continue for at least five years or until age 59½, whichever period is longer, and the distributions cannot be rolled over.

There are a number of additional rules associated with 72(t) retirement income payment schedules. You must take consistent distributions, not modify the agreed-upon schedule or account, and pay the appropriate taxes on your withdrawals. If you violate this contract, then the 10% penalty will apply to all distributions taken prior to age 59 ½. This is known as the recapture penalty.

If you are on a 72(t) retirement income distribution schedule, you will want to avoid making any additions or rollovers into this account. A rollover of new funds into this IRA will modify the IRA balance and trigger the retroactive 10% penalty.

9. Trying to Rollover Different Property Types

If you make a cash withdrawal from your IRA or 401(k), then only cash can be rolled back over. If you withdraw stock from your IRA, then only that stock is eligible to be rolled back over.

It must be the same property; otherwise, it cannot be rolled over.

If you have highly appreciated stocks, you may be tempted to try and transfer them into an IRA to avoid capital gains taxes when eventually selling your shares.

Don't let a contentious divorce cause you to make an IRA Rollover Mistake that will increase you tax … [+] liability.


10. Divorce And 401(k) Plan

When 401(k) or IRA funds split in a divorce and are withdrawn, those funds are taxable and cannot be rolled over to the ex-spouse's retirement account IRA. Attempting to do so is a common and costly mistake.

To avoid adverse tax consequences, 401(k) and IRA funds should be moved from one spouse's IRA to the other's via a tax-free direct transfer called a QDRO. It is crucial, if going through a divorce, to consider the after-tax value of assets and how you plan to use those assets.

For example, $1 million in a 401(k) will not equal the same amount of cash in a bank account because taxes will be owed on the $1 million when it is withdrawn from the 401(k).

wise, $1 million of home equity may not be as valuable as the same amount of money in the bank if you will need to sell the home.

A trusted fiduciary financial planner can help you make the wisest choices with your retirement funds. Keep in mind, he or she may not always be able to clean up the mess after a big 401(k) rollover mistake has been made.

Источник: https://www.forbes.com/sites/davidrae/2021/01/31/10-costly-401k-rollover-mistakes-to-avoid-now/

Five retirement mistakes to avoid

Avoid these 401(k) mistakes at all costs

Retirement may seem a long way off and far removed from your day-to-day concerns. And yet, this is actually the best time to start planning and saving — that is, when you still have time to accumulate the money you’ll need.

Here are some common mistakes that throw people off course in their retirement planning. Knowing these pitfalls should help you steer clear and save more.

Mistake #1: Failing to take full advantage of retirement saving plans

If your company’s 401(k) or other qualified employer sponsored retirement plan (QRP), including 403(b) and governmental 457(b), offers a company match (meaning that your employer pledges to match your contribution up to a certain percent of your salary), you have an extra incentive. If you neglect to invest enough to receive the full company match, you’re leaving money on the table. If you get a raise, consider increasing your QRP contribution.

“ If you neglect to invest enough to receive the full company match, you’re leaving money on the table. ”

Mistake #2: Getting the market after a downturn

When the market takes a big hit, you may be tempted to pull out all the stocks in your retirement portfolio. If you do, you’ll miss the gains if the market turns around. You want to keep a good mix of asset classes in your portfolio: stocks, bonds, and cash. And once a year, you should rebalance to keep your asset allocation on track. 

Mistake #3: Buying too much of your company’s stock

If your employer's stock shares are an investment choice in your 401(k), you may want to consider keeping your allocation to no more than 10 percent.

You’re not being disloyal; even the mightiest of companies — think Enron and WorldCom — can falter.

With your salary already tied to your company’s fortunes, you don’t want a sizable part of your retirement savings to be similarly dependent. 

Mistake #4: Borrowing from your QRP

Many QRPs allow you to borrow from your account. Unless you need the money for an emergency, try not to. Borrowing can be an expensive choice, in two ways: 

  • Smaller retirement savings: When you take out a loan you are losing the potential for investment growth and that could leave you with a smaller retirement savings. How much smaller? This depends on a number of factors, including the size of the loan, the repayment period, whether you continue contributions during this period, the earnings on your account, and the loan interest rate. Also, if you stop contributing while you are paying back your loan, you won’t receive any employer matching contributions.
  • Repayment requirements: If you lose your job or take another one, you’ll have to repay the money quickly, usually within 30 to 60 days. However, if not repaid, the outstanding loan balance is generally subject to income tax and possibly an IRS 10% additional tax for early or pre-59 1/2 distributions.

    The 2020 Coronavirus, Aid, Relief and Economic Security (CARES) Act includes provisions providing greater repayment flexibility for certain individuals affected by the coronavirus pandemic.If these apply to you, you should still consider the potential effects of borrowing from your QRP on your ability to reach your retirement goals.

In addition, cashing your 401(k) when you move to a new employer might be costly as well. Know your distribution options when changing jobs.

Mistake #5: Underestimating the cost and length of retirement

Some crucial factors to take into account: 

  • Longevity: If you retire around age 65, you could spend a quarter century or more in retirement. Many advisors now urge clients to save enough to last 25 to 30 years.
  • Inflation and taxes: Even with relatively mild inflation over the past 25 years, the cost of living has more than doubled. Also consider what taxes you’ll be paying on the money you distribute from your retirement account. 
  • Health care: Even with Medicare, you could have expenses for supplemental insurance, some prescription drugs, and nursing home care. 
  • Lifestyle sticker shock: People in retirement generally need at least 80 percent of their pre-retirement income.
  • Retirement,
  • Saving for Retirement

This information is provided for educational and illustrative purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Investing involves risk, including the possible loss of principal.

The accuracy and completeness of this information are not guaranteed and are subject to change.

Since each investor's situation is unique, you should review your specific investment objectives, risk tolerance, and liquidity needs with your financial professional to help determine an appropriate investment strategy.

Investment and Insurance Products are:

  • Not Insured by the FDIC or Any Federal Government Agency
  • Not a Deposit or Other Obligation of, or Guaranteed by, the Bank or Any Bank Affiliate
  • Subject to Investment Risks, Including Possible Loss of the Principal Amount Invested

Investment products and services are offered through Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC (WFCS) and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.

Retirement Professionals are registered representatives of and offer brokerage products through Wells Fargo Clearing Services, LLC (WFCS).

Discussions with Retirement Professionals may lead to a referral to affiliates including Wells Fargo Bank, N.A. WFCS and its associates may receive a financial or other benefit for this referral.

Wells Fargo Bank, N.A. is a banking affiliate of Wells Fargo & Company.

Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.

Wells Fargo and Company and its affiliates do not provide tax or legal advice. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.


Источник: https://www.wellsfargo.com/financial-education/retirement/avoid-mistakes/

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