When planning for the future, one or two small mistakes can undo years of progress. A recent article from Kiplinger takes a look at four very speicific mistakes that can be made in managing retirement accounts. I’ve already looked at the unintended consequences that early withdrawal and interrupting annual payments could have. This is the third possible money-wasting error in the series of four.
Taking a check from a 401(k) rollover can end up being a big mistake. Normally, if you are switching from one retirement account to another, you can simply instruct the brokerages or mutual fund companies to transfer the funds directly without selling shares. If that isn’t possible, there is no penalty if a check is sent directly from one custodian to another. If the check is sent to you, you open yourself up to drawing a withdrawal penalty.
If you decide to transfer your 401(k) or other retirement assets to an IRA, make sure they go directly to the new custodian. If your employer cuts you a check, the company will be required to withhold 20% for taxes and you will have to roll over the entire amount — including the 20% you didn’t receive — into an IRA within 60 days. Any money not deposited into the IRA would be treated as a taxable distribution, subject to taxes and early-withdrawal penalties.
When I switched a brokerage account from Wachovia to Scottrade, I made sure the brokerages handled the transfer. Wachovia never sent a check to me, and there was no sale of the mutual fund. This is the way to go for retirement accounts, as well.