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Common 401k Rollover Mistakes and How to Avoid Them
Manage episode 361925659 series 3345764
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Welcome back to Navigating an Abundant Retirement Radio! This week, we'll be talking about the common mistakes that people make when rolling over their 401(k) and how to avoid them.
You probably have at least one traditional retirement account, such as a 401(k), 403(b), or IRA. The tax treatment of traditional retirement accounts is the key difference between these accounts and regular ones. With a traditional retirement account, you get a tax deduction on the front end, allowing you to contribute the full amount without paying income taxes. The account also provides a tax deferral, which means you won't owe taxes until you withdraw the money, allowing the account value to grow more quickly.
401(k)s are one of the most common retirement accounts, and if you're listening today, you likely have one or more. Although 401(k)s are flexible and give you choices as you go through life, people often make mistakes when it comes to rolling over these accounts. Today, we'll cover important information about 401(k) rollovers and potential mistakes.
One of the biggest mistakes is cashing out your 401(k) when you leave your employer. Doing so will not only result in taxes and penalties but also the loss of years of potential tax-deferred growth. A better option is to roll over your 401(k) into a new 401(k) or an IRA. If you choose an indirect rollover, you have only 60 days to deposit the money into another qualified retirement account, which can be risky. Instead, a direct rollover is your most mistake-proof option.
If you make an early withdrawal from a 401(k), you'll end up with much less than you think due to taxes and early withdrawal penalties. Only a few exceptions, such as becoming permanently disabled or splitting the 401(k) with your spouse during a divorce, allow you to avoid the early withdrawal penalty.
In conclusion, understanding and following the rules of retirement accounts are essential to avoid potentially expensive mistakes.
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