Financial Opinion and Insights

How NOT To Rollover Your 401(k)

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

When people retire, they face the decision of what to do with their 401(k) plan assets.  Often, for many, it’s the first time they’ve ever had to make important decisions about all the money they’ve worked years to accumulate; and sometimes they get it wrong.

One huge mistake many make is simply requesting a check from their company, intending to open-up an IRA account with the assets.

Not good,  The company must withhold 20% for taxes, so a person with a $300,000 account might be surprised to see $60,000 missing as s/he receives a check for $240,000.

The bad news isn’t over.  To complete a tax-free rollover, the tax payer must deposit that check for $240,000 in an IRA plus $60,000 from their pocket!  And, it must be done within 60-days of receiving their check from the company plan.

Your thinking: `Wait!  How is this tax-free if the company withheld the $60,000?’  The answer isn’t pretty, either.  The taxpayer may eventually get the $60,000 withheld as a tax refund the following year.  That, of course, doesn’t their current cash flow picture.

Like my dad once told me, “If you think knowledge is expensive, try ignorance.”

There’s more you should know if you’re facing an IRA rollover decision.  Feel free to request our report, “Six Best & Worst IRA Rollover Decisions”.  Just use the Request Info tab on our website.


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  He’s been a headline speaker at conventions throughout the United States, Canada, and the U.K. and has appeared in `The Journal of Compensation and Benefits’, as well as in The Profit Sharing Council of America’s `Insights’.    Jim has also appeared on American Airlines’ `Sky Radio’, heard on more than 19,000 flights.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained herein should be regarded as tax or legal advice and the reader is urged to seek competent counsel to address those issues.   The above represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a formal financial and investment plan.   For questions or comments, you can reach Jim at 805.265.5416 or through the IFG website, http://www.indfin.com.

Written by Jim Lorenzen, CFP®, AIF®

May 17, 2011 at 10:00 am