Avoid These 7 Mistakes When Transferring Money Between Retirement Accounts

One of the most important financial decisions you will make is How to Handle Your Retirement Accounts when changing jobs. Properly rolling over your 401(k) or other accounts can ensure your hard-earned retirement savings continue to grow tax-deferred. But making mistakes during this process can cost you a lot in taxes, fines, and lost future growth.

Here are six potentially costly mistakes to avoid when Rolling over retirement money, according to financial advisors.

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Have the rollover check paid to you

“The transfer from your 401(k) to an IRA or other 401(k) is usually done by check. Don’t write the check to yourself! said Jake Skelhorn, CFP and former Merrill Lynch advisor now in Spark Wealth Advisors. “This is taxable and will be subject to a mandatory 20% withholding. The rollover check must be made payable to the earning institution or sometimes your employer’s name if it’s a 401(k).

Not Paying Off 401(k) Loans First

“Pay off all loans before rolling over,” shared Skelhorn. “Most of the time, processing a rollover closes your old 401(k), which will cause you to stop paying any outstanding loan balances. The loan will be reclassified as a withdrawal and will be subject to taxes and possibly penalties. If you can, pay off the loan first, not only to avoid taxes but also to put more money back into the tax-deferred account where it can continue to grow.”

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Using a 60-day indirect rollover

“Using a 60-day extension, also called an indirect extension, is a big mistake,” said Stephen Kates, CFP and principal financial analyst at Annuidade.org. “All rolls must be set up for transfer in what is called a ‘admin to admin transfer’ process.”

With a trustee-to-trustee transfer, money is transferred directly between financial institutions without you taking ownership of it. This avoids the 60-day deadline, mandatory 20% tax withholding, and the risk of forgetting to re-deposit funds before the deadline.

“A trustee-to-trustee transfer means the money will be transferred directly between financial institutions and will not be received or handled by the person who owns the account,” Kates said. “This is a cleaner, safer way to transfer money and will limit any errors.”

Not separating pre-tax and post-tax funds

“It’s important to understand the tax status of your retirement money, especially if you have a mix of pre- and after-tax contributions in your retirement account,” Kates said. “When making transfers, investors will need to direct pre-tax and after-tax money into separate accounts to ensure they are not improperly mixed or mailed as retirement distributions.”

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Being unprepared with transfer details

Before initiating a rollover, you will need to have these important details about the receiving account:

• Name of the receiving institution

• Address of the receiving institution

• Account number at the receiving institution

• Account type (IRA, 401(k), etc.) to receive the funds

“Prepare the necessary information before starting the transfer,” said Kates. “Most institutions need [these] four pieces of information to complete a transfer.”

Tax activation and possible penalties

In addition to the mandatory 20% withholding if you receive funds directly, early withdrawals from tax-deferred retirement accounts before age 59½ are subject to regular income tax plus a 10% penalty in most cases. This can seriously harm your retirement savings.

A rollover properly treated as a trustee-to-trustee transfer avoids taxes and penalties since the money never leaves the tax-deferred retirement account environment.

Not taking a comprehensive approach to wealth management

“The simplest and best method of maximizing retirement accounts comes from quality communication between tax professionals and financial professionals in unison on behalf of a client,” said Ryan Moore, financial advisor at TBS Retirement Planning. “Take that communication a step further and bring in the wealth lawyer, and then you have the entire spectrum of wealth being viewed in a cohesive way.”

Moore emphasizes the importance of having an integrated wealth management strategy that coordinates retirement account rollovers with overall tax planning and estate planning goals.

“A missed opportunity when it comes to transferring retirement accounts is not maximizing your current tax return and calculating the costs of potential Roth conversions each year,” he said. “If it is possible to make money grow tax-free in the future, then most of the time the initial conversion cost is small compared to the lifetime benefit gained in the process, as well as the generational benefits gained by transferring money to heirs.”

The bottom line is that while extensions seem simple at first glance, there are many potential pitfalls that could cost you a substantial portion of your retirement savings in avoidable taxes and penalties. Following the above advice from financial advisors can help ensure your extension is completed accurately and without any unnecessary fees or taxes that will harm your future retirement income.

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This article originally appeared on GOBankingRates. with: I’m a Financial Advisor: Avoid These 7 Mistakes When Transferring Money Between Retirement Accounts