One of the most important decisions boomers will make when it comes to their retirement is how to handle that 401(k), pension or other qualified retirement plan when they leave their job for good. Not that you necessarily have to roll that 401(k) immediately. In fact about 40% of boomers don’t take action within the first year of leaving their employer. Eventually you will have to rollover those funds.

One of the main advantages of rolling over your retirement account to an IRA is that it gives you many more investment options than those dozen or so mutual funds that you had in the company 401(k). Along with that opportunity come a set of red flags that you need to be aware of so you don’t end of paying unnecessary taxes and penalties. Here are five of the most common blunders pre-retirees make.

1. Missing the 60-Day Rollover Deadline – You have a window of 60 days to move your retirement plan to an IRA tax-free. The clock starts ticking as soon as your money leaves your 401(k) account. Don’t let time slip by while you are on vacation or when the check gets lost in the mail. Keep track of the time or have your financial advisor assist you. The easiest way to avoid this potential problem is to request a direct transfer of your assets to the IRA account that you will set up ahead of time.
2. Naming the Wrong Beneficiary – Sometimes if your finances are complex your attorney or other advisor recommends a specific vesting that the financial institution holding your IRA cannot accommodate. Another problem occurs when spouses get divorced and fail to update their beneficiary designation. The halls of attorneys’ offices are littered with ex-spouses who inherited money unintentionally because their ex forgot to change the beneficiary. Sign a beneficiary designation form when you set up your account and get up to date with your life events i.e. death, divorce, marriage and update your beneficiaries as they occur.
3. Not Paying Off Loans Before Rolling Over – Any loans outstanding when you roll over your retirement account will be considered a distribution – taxable and subject to penalties. Before rolling your funds your plan administrator will deduct the amount of the loan. The IRS considers the difference a distribution. Pay off your loans before you rollover the funds.
4. Cashing Out Your Retirement Account – Yes, it can be tempting to spend some of that hard earned retirement money. The problem is you can be subjected to taxes, penalties and loss of the growth that you enjoyed while your money was invested. Any cash you take out to pay off loans or to buy something will be considered a distribution and therefore taxable. If you don’t replace it within that 60-day window discussed in #1 above it will be taxable.
5. Failing to Consider a Roth IRA Rollover – We love the benefits of tax deferral. We can keep Uncle Sam’s mitts off of our money only for so long. We know that eventually we will have to pay taxes on our retirement money. If you rollover your funds to a Roth IRA you will pay taxes in the year you roll the funds but…future earnings will be tax free. Wouldn’t it be great to get the taxes out of the way up front and not have to worry about paying taxes on those Required Minimum Distributions down the road? Does it make sense for you? Talk to your Financial Advisor and ask for a Roth analysis.

Of course there are more blunders that you need to avoid. These are 5 of the most important that come to mind. You have worked hard to accumulate your retirement nest egg. Don’t blow it by making one of these mistakes. There is no “Oops Button”; some of these blunders can be fixed. It can be costly and time consuming. I recommend that you don’t go it alone. Work with an expert who can keep an eye on things while you are getting ready for your retirement journey. Good luck and congratulations!

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What is your biggest concern about rolling over your retirement account? You can leave a comment here.