“Tis the season”, as many people say this time of year. The Holidays are a season of celebration of many varieties. It is also the time of year when many people choose to change jobs or “retire” from one career to start a new career. Often left out of the celebration is the company retirement plan that gets left behind many times without much thought. We live and work in an era of defined contribution retirement plans. Yes, it’s not our father’s or grandfather’s retirement plan.

No longer does the company provide a guaranteed pay check in retirement in the form of a pension or “defined benefit” plan, as they are called in financial services parlance. For most of us, the benefit is “undefined” because we are responsible for putting some of our hard-earned money into 401(k) plans and the like. It’s a self-service retirement these days and the more we save, the better off we will be.

Even more reason to make sure that you don’t leave that retirement plan behind at your former employer unless there is a good reason to. Here are 5 Rollover Mistakes and How to Avoid Them.

1. Leaving your plan at your employer – This one is a little tricky because with some research you may find that it makes sense to leave your 401(k) with your former employer’s plan sponsor if it is an exceptional plan. My advice is to engage a financial advisor to review your plan to see if that is your best option. Usually it is not but don’t take any chances. In some cases, your employer won’t allow you to leave it so check with your human resources department for your options.
2. Missing the 60-day Rollover Deadline – So, let’s say you have decided to rollover your retirement plan into an IRA at your bank or credit union. The 60-day window starts as soon as your money leaves your original account. Again, my advice is to work with a trusted financial advisor, so you don’t have any unnecessary delays. You can transfer the funds from your old plan to an IRA tax-free if you complete the transfer within the 60-day window. The penalty is steep if you whiff on this one. The whole distribution will be taxable in one year. If you are under 59 ½ you will also pay a 10% penalty.
3. Not paying off loans before rolling over – I see a lot more of this situation today as many people have taken out a loan against their 401(k). If you don’t pay off any outstanding loans before you do a rollover, the outstanding loan amount will be considered a distribution by the IRS and you will pay taxes on the amount of the loan. Again, if you are under 59 ½ you will get socked with the 10% penalty.
4. Cashing out or taking an indirect rollover – It can be tempting to take some of your retirement funds directly and use them to buy an RV or a boat or a new car. Some people do this with the intention of replacing it within the 60-day window. Keep in mind, any funds you don’t replace within the 60-day window will count as a distribution and will be subject to taxes and a penalty. My advice is to leave the funds intact and avoid spending the money.
5. Failing to consider a Roth IRA – We love the benefits of tax deferral. Unfortunately, it doesn’t last forever. At some point we will all have to pay taxes on your retirement funds. If you roll your retirement funds into a Roth IRA you will pay taxes on the funds in the year that you do your rollover, yet future investment earnings will be tax-free. If you can tolerate the tax hit, you won’t have to worry about paying taxes on your IRA distributions in the future. Talk to a financial advisor to do an analysis to see if the Roth Rollover makes sense for you.

   If you are thinking about retiring in the next five years or so, check out my Retirement Ready Checklist. It’s free!