401(k) Withdrawal Mistakes to Avoid
These strategies will help you minimize the taxes and fees you pay on 401(k) distributions
Simply saving in a 401(k) plan isn't enough to ensure your retirement security.
You also have to withdraw the money from your retirement account in a way that maintains as much of your spending power as possible. This typically involves taking steps to minimize taxes and avoid fees and penalties.
Making these 401(k) withdrawal mistakes could cost you in retirement.
Leaving before you are vested
While you always get to keep your personal 401(k) deposits, you don't get to keep your employer's contributions until you are vested in the plan. Retiring or leaving the company before you are fully vested means that you could forfeit some or all of your 401(k) match. If you are close to becoming vested in the plan, sticking around a few extra months could add hundreds or even thousands of dollars to your nest egg.
Not doing a direct rollover
If you decide to transfer your retirement savings from a 401(k) to an IRA, ask your former employer to directly transfer the money to an IRA or different 401(k). If the company makes out the check to you, 20 percent of your account balance will be withheld for income tax. You will then have 60 days to deposit the cash, including the amount withheld, in a new tax-deferred retirement account before Uncle Sam keeps the 20 percent and you become responsible for any additional income tax due. If you're under age 55, you will also have to pay a 10 percent early withdrawal penalty on any amount not deposited in a new retirement account. "Make sure if you are going to roll over an old 401(k) that you always have the check made payable to the new custodian," says
Rolling over into higher-cost investments
Transferring your retirement savings from a 401(k) to an IRA upon retirement or a job change often makes sense because IRAs typically offer more investment choices and lower expenses than 401(k) plans. However, if you have an especially good 401(k) plan where your former employer negotiated low investment fees on behalf of employees, you might want to leave the money in your old 401(k) plan. "If you have some really good investment options in your plan, that would be a good reason to keep your money in your 401(k)," says
Two required minimum distributions in the same year
Withdrawals from retirement accounts generally become required after age 70½. Those who fail to withdraw the correct amount must pay a 50 percent excise tax on the amount that should have been withdrawn. You must take your first distribution by
Withdrawals before retirement
If you take 401(k) withdrawals before age 55, you will generally have to pay income tax and a 10 percent early withdrawal
penalty on the amount withdrawn. That means if you withdraw
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Personal Finance - 401(k) Withdrawal Mistakes to Avoid
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