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Common 401(k) Rollover Mistakes

Common 401(k) Rollover Mistakes

Every year, thousands of people rollover their 401(k)s. As a whole, 401(k) rollovers are about a $500 billion dollar industry. However, they require a triggering event before you can perform one. These events are frequently caused by the decision to leave a job or retire. For individuals leaving a job, many roll their 401(k) plans into an IRA. While 401(k) rollovers are common, many people make mistakes both before and after the rollover process. In this article, we will discuss common mistakes made during the process of rolling over your 401(k).

Key Points
  • In order to access 401(k) funds, you must have a triggering event
  • When you are able, you may choose to roll over those funds into a new retirement plan
  • Here are several mistakes people make that you should be aware of

Triggering Events

To gain access to your 401(k) funds, you need to have a triggering event. A triggering event means you leave your job, your plan gets terminated or you reach age 59 1/2. Those are the three most common ways that you gain access to your 401(k) plan funds. So, if you’re under 59, or still work at the company that holds your 401(k), you generally cannot take the money out.

So, what can you do if you’re under 59 1/2 and don’t satisfy a plan triggering event? First, you can opt for a 401(k) loan, assuming your plan offers that option. If you have the option to take out a 401(k) loan, you can borrow $50,000 or up to 50% of your account value, whichever is less. The loan can be used for any purpose. A 401(k) loan is tax and penalty-free.

You can also try to satisfy a hardship withdrawal. However, hardship withdrawals are not easy. You need to have significant financial needs, medical bills, or other types of hardships. However, the IRS does charge 10% taxes on what you pull out, just not a 10% early distribution penalty.

Related: Leaving Your Job? Don’t Forget Your Money!

How to Rollover 401(k) Funds

If you have a triggering event, you may rollover your 401(k) funds. Most people rollover their 401(k) funds into an IRA. If you have a job with a new company, many organizations will allow you to transfer your old 401(k) to your new 401(k). If you are self-employed, you also have the option to rollover your funds into a Solo 401(k).

Essentially, you simply need to fill out some paperwork to move the funds from your old 401(k) to a new plan. An IRA is usually your best bet. You can choose where to open the plan or even decide to self-direct it. Of course, make sure your Self-Directed IRA provider offers the investment class you want.

If your new job has an attractive plan, or you simply want to keep your funds in one place, you may wish to bring those funds with you. Most employers will allow you to roll previous plan funds into their 401(k). Just make sure that is an option your employer allows for.

Read More: Importance of Investment Diversity

Common 401(k) Rollover Mistakes People Make

While rolling over your 401(k) is a common process, people frequently make mistakes. These are the most common mistakes individuals make when rolling over their 401(k) plans:

Failing to meet the 60-day deadline. Many people think they have time to rollover their 401(k) plans. Unfortunately, you have 60 days to complete the rollover. If you do not complete the rollover within that time frame, you will be subjected to a taxable distribution.

Forgetting About Your 401(k). Many people simply forget about their 401(k) when leaving a job. According to Forbes, “Americans lost track of more than $7.7 billion worth of retirement savings in 2015 alone by ‘accidentally and unknowingly’ abandoning their 401(k).”

Trying to Rollover an After Tax 401(k). After-tax retirement funds cannot be rolled over into a new company 401(k). Many people experiencing this issue will often open a Roth IRA.

Failing to Understand Roth Conversions. If you convert your pretax 401(k) to a Roth IRA, you will owe taxes. However, there are notable benefits to performing a Roth conversion. Just know the tax consequences before converting.

Taking Money Out. Another common mistake people make is to take money out of their 401(k). While you can take money out of the plan, you will be subject to taxes and possible penalties. Between the taxes and the loss of retirement funds, withdrawing 401(k) funds can have a detrimental impact on your finances. Additionally, if you need the money due to financial circumstances, you could open a Solo 401(k) and take out a loan. As long as you have some form of self-employment income (such as working as an Uber driver, or driving for DoorDash), you are eligible for a Solo 401(k) loan.

Learn More: Jobs Anyone Can Do to Generate Self-Employment Income

Failing to Consider Investment Options. Some companies only allow you to invest in stocks, bonds, and mutual funds. However, others allow you to invest in both traditional and alternative assets. The most common alternative assets in an IRA include real estate, precious metals, and cryptocurrency.

Learn More: Beginner’s Guide to Investing in Real Estate with Retirement Funds

Read More: Why Invest in Alternative Assets?


First things first, make sure you have access to your 401(k) funds. Generally, so long as you don’t work for the company sponsoring the plan, you should be free to roll those funds over. Attaining the age of 59 1/2 or the termination of the plan are two other triggering events to gain access to the funds.

Once you have access to those funds, be careful not to make any 401(k) rollover mistakes. Know where you want those funds to go, what you want to invest in, and any tax consequences beforehand. It’s best to consult with a financial advisor to ensure you are making the best move for you. If you’re considering rolling over your 401(k) contact IRA Financial Group today to learn how to invest in traditional and alternative assets.


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