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As you near retirement, no decision is harder—or has higher stakes—than what to do with your workplace retirement plan. The decision you make, however, depends on your specific situation. Before you sign off on the paperwork, heed the advice of Affinity Wealth Management, which highlights seven of the most common missteps people make when rolling over their 401K.

1. Not reviewing and understanding all six options

An IRA rollover is not your only option when you switch jobs or retire. You can also convert to a Roth IRA, move plan assets directly to your new employer plan, take a lump sum distribution, leave it in the current plan, or you can convert plan assets to a Roth account (known as an in-plan Roth conversion).

2. Receiving a distribution personally and being subject to 20 percent tax withholding

You have 60 days to redeposit a distribution into an IRA or it counts as a taxable distribution (plus penalty if you’re under age 59 ½). Also, when the account is distributed to you, it is subject to a 20 percent withholding. You get the withholding back when you file your tax return, but you must come up with 100 percent of the money in 60 days to complete the rollover. To avoid this potential pitfall, you may want to consider a trustee to trustee transfer to move plan assets from one custodian to another.

3. Not knowing the creditor protection of IRAs in your state

Federal law prohibits creditors from going after money in a retirement plan that was set up under the Employee Retirement Income Security Act (ERISA). Most company-sponsored retirement plans fall under this category.

4. Rolling over highly appreciated company stock to an IRA

Reduce taxes by transferring appreciated company stocks into a taxable brokerage account using the Net Unrealized Appreciation (NUA) strategy. You are then only responsible for ordinary income tax on the original purchase price of the stock when it is rolled over, but you will pay a long term capital gains rate of 20 percent or less when the stocks are sold. This strategy can reduce taxation on your plan assets over time.

5. Not allocating the after-tax portion (basis) to a Roth IRA tax free

The IRS will now let you transfer your pre-tax dollars directly to a traditional IRA and your after-tax dollars to a Roth IRA. This allows the after tax dollars to immediately grow, tax-free. The cost of this move: zero. While it has been easy to roll Roth 401K money to a Roth IRA tax free, that hasn’t been the case with after-tax money in a traditional 401K.

6. Doing an in-plan Roth or 401k to Roth conversion before estimating the tax effect

In either case, the conversion is taxable as if the amount were distributed to the participant, although it is exempt from the 10 percent early withdrawal penalty that would otherwise apply. Be sure you have accounted for the taxes due in the year of the conversion.

7. Rolling over your 401K before age 59 ½ after separating from service after age 55

Usually if you withdraw money from an IRA before age 59 ½, you’ll have to pay taxes on the withdrawal plus an additional 10 percent early withdrawal penalty (with some exceptions). However, if you leave your employer after age 55, the 10 percent withdrawal penalty does not apply to 401K accounts. Leaving your money in the plan allows access to the funds, if needed, without penalty.

Affinity Wealth Management has been successfully managing money for over 40 years. Affinity Wealth Management is in an ideal position to help meet your needs. When you choose Affinity Wealth Management, you benefit from obtaining comprehensive advice from a team of highly qualified professionals who have successfully managed money through some of the most difficult times in history. As a team, Affinity Wealth Management has decades of combined asset management experience.


1702 Lovering Ave.
Wilmington, DE 19806
(302) 652-6767

630 Freedom Business Center (third floor)
King of Prussia, PA 19406

51 JFK Parkway First Floor West
Short Hills, NJ 07078

Email: invest@affinitywealth.com
Toll free: 1-800-825-8399

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Securities offered through Coastal Equities, Inc., member FINRA/SIPC, 1201 North Orange Street, Suite 729, Wilmington, Delaware 19801. Coastal Equities, Inc. and Affinity Wealth Management, Inc. are not affiliated.

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