401(k) Rollovers: Small Mistakes Have Big Consequences

October 27, 2023

A few years back, I met with a very smart executive that made a mistake with his 401(k) that was so big I hesitated to expose to him the gravity of his error. You see, this was one of those mistakes that a person would not even know they made and could carry on oblivious to the damage, forever paying higher tax rates they never knew they could have avoided. Adding to the pain is that this error was facilitated by his broker whom he thought was giving him good advice.

As many executives consider new career opportunities and even early retirement, they are also faced with how to properly manage their current benefits as they transition. No one wants to be the person I mentioned above. To help you avoid some 401k rollover landmines, here are some areas for you to consider:

  • Deadlines:
    • There are specific deadlines for moving money between plans and retirement accounts. If you don’t follow these deadlines, taxes and penalties will be substantial.

  • Company Stock to Reduce Taxes:
    • Evaluate whether you could use company stock to achieve a lower tax exposure in the future.
    • There are a lot of moving parts to this, but it could be very rewarding for executives in the right scenarios. The above executive did not know about this and got it WRONG.

  • Different Account Tax Types
    • Know the difference between Traditional, ROTH and Non-ROTH holdings and how to leverage them to limit taxes in the future.

  • Withdrawal Types:
    • Know the difference between a withdrawal, a rollover, a loan and any other types of distributions as well as their tax and penalty risks.

Every situation is different. Even within the same employer, our clients are often able to utilize different tax hedging strategies depending on their own scenario, so don’t just follow a colleague’s lead.

And make sure the people you have guiding you truly know the intricacies of your wealth, have the experience to create thoughtful solutions and the ability to deliver for you over time. Anything less is a waste of your time.

 - Tim Golas
    Partner, Spurstone