| Avoid these costly mistakes when rolling over a 401(k) to an IRA | | |  | WED, JAN 06, 2021 | | | | All of us make mistakes, some big, some small.
However, when it comes to your money and specifically your 401(k) plan, the results from a mistake can be very costly.
That's why it's important to become familiar with the rules of a 401(k) rollover. Incorrectly rolling over your 401(k) to a new retirement savings plan can leave you with less-than-sufficient retirement savings or even delay retirement altogether.
The bottom line is this: you need to take a close look at whether rolling your workplace 401(k) into an IRA makes sense for you and your family.
There are plenty of pros and cons to both options. Both a 401(k) plan and an IRA are tax-advantaged retirement accounts, but they work differently. You need to consider whether rolling over a 401(k) to an IRA is the better option than either leaving it invested when you leave your job or moving the money to your new employer's retirement plan.
However, if you decide to roll your 401(k) to a new plan, it's key to avoid some common mistakes because the process itself can come with snags if you're not careful.
For example, many people do not know their vesting schedule. Contributions you make to your 401(k) are vested, meaning that salary-deferral contributions you make are yours, free and clear, once you leave your current employer.
Cashing out your old 401(k) is a costly mistake. It can certainly leave you with insufficient retirement savings and it may force you to work a few extra years before you can afford to retire. Not only will you owe more in taxes, but get ready to add a 10% penalty on top of that tax bill if you cash out before age 59½.
Finally, don't wait too long to handle the roll over. If you don't roll your 401(k) funds over within 60 days of receiving a check from your former employer, the IRS treats the payment as a distribution, not a rollover. As a result, that distribution will accrue a 10% penalty if you are under the age of 59½. It will also create some unwanted tax implications.
For more key stuff like this, please follow me on Twitter @jimpavia and check out CNBC's Financial Advisor Hub and CNBC + Acorns Invest in You: Ready. Set. Grow. | | There's no such thing as a local advisor anymore | | "One of the consequences of 2020 that is not yet fully realized within the financial advisory profession is the fact that now 100% of current and potential clients of wealth management firms have become comfortable doing business online and on the phone..." | | | |
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