Avoid These Costly Retirement Account Rollover Mistakes

According to Vanguard, more than one-quarter (28%) of rollovers to individual retirement accounts (IRAs) conducted in 2015 “remained in cash for least seven years.” This behavior has resulted in a large opportunity cost for many investors in terms of foregone wealth.

It is not the only mistake investors make when completing a rollover, moving an account to a different brokerage firm or doing another type of account transfer. Even seemingly small mistakes can have significant unintended consequences. Here are some of the main ones to avoid.

Failing to List Your Beneficiaries on the New Account: We’ve seen court cases where a family member didn’t inherit an account because the beneficiary information was not updated or completely left off. While it is easy to postpone doing this, it can have a big impact on how your estate is settled. Make the effort to fill out the beneficiary forms—and update them as needed. In doing so, ensure you have the correct Social Security number(s) and/or the trust’s employer identification number (EIN).

Forgetting About Past Accounts: There were an estimated 29.2 million 401(k) accounts left behind or forgotten in 2022. The total value of those accounts equated to 25% of all 401(k) plan assets, according to Capitalize. [Capitalize operates a platform for transferring 401(k) accounts.] Such left-behind accounts could continue to incur fees, be left in higher-fee investment options and eventually be cashed out. It’s a good practice to check https://unclaimed.org once per year to ensure there’s no money you’ve unintentionally left behind.

Failing to Consider Fees and Costs: Never overlook the fees you may be charged. One is the fee charged by your current broker or 401(k) sponsor to transfer your account. Another is any fees or commissions charged by the firm, plan or adviser you are moving the account to. Then there are investment-related fees. The 401(k) plan provided by a new employer may not have the same low-cost fund options your former 401(k) plan had. The investments suggested by a new adviser or planner may have higher expense ratios and/or tax-cost ratios than the investments you held at your old firm. Always do a comparison.

Letting Your Recordkeeping Lapse: When taxable accounts are moved, you are still responsible for taxable gains or income realized at the former account. Similarly, if you move a retirement account, you are still responsible for any required minimum distributions (RMDs) due for the current year. You should also note any cost basis for investments held in a taxable account that has been transferred.

Doing an Indirect Rollover: If you take a direct withdrawal from an IRA or other retirement plan—meaning you have all or part of the balance sent directly to you—you have 60 days to put the funds back into an IRA or similar type of account. Failure to do so will result in the withdrawal being taxed (for tax-deferred accounts) and potential penalties assessed if you are under the age of 59½. You can also only do one direct IRA rollover every 12 months.

Not Changing Your Passwords: Create a new password every time you open a new financial account. Doing so will help protect you from data breaches. Each of my financial accounts has a different password. So should yours. While your brokerage account is most likely covered by the Securities Investor Protection Corp. (SIPC), this does not protect you from the hassle of identity theft.