Common Rollover Mistakes

Changing jobs often means making many decisions – including what to do with your 401(k) plan. With Americans changing jobs an average of 10 times during the course of their careers, many are making costly mistakes when it comes to their retirement savings plans.* If you plan on taking your retirement savings with you when you change jobs, protect your nest egg from the following common mistakes.

When making the move to a new job, many people are tempted to cash out of their current retirement plan. In 2004, 45% of employees who left their jobs ended up cashing out their 401(k) plans instead of rolling their assets into another tax-sheltered account.** While spending your distribution on a new car or dream vacation may seem tempting, here are some things to consider before cashing out your plan.

• If you are under age 59½, you may have to pay a 10% early withdrawal penalty.

• Your employer is required to withhold 20% of your distribution for the prepayment of federal taxes. This amount may increase depending on your tax bracket and any applicable state taxes.

If you are planning on rolling your retirement assets into an individual retirement account (IRA) or another employer-sponsored plan, the Internal Revenue Service (IRS) allows you 60 days to complete the transfer. Exceeding this timeframe can have some serious ramifications for your retirement assets.

• If your assets aren’t deposited directly into an IRA or qualified retirement plan within 60 days, they become ineligible for any of the tax benefits of a rollover. The full distribution amount is then subject to ordinary income taxes. And if you are under age 59½, you may also be subject to a 10% penalty.

• If you deposit your money into an IRA or qualified retirement plan after 60 days, you may be subject to a penalty if the deposit exceeds the IRA contribution limit. (For 2006, the IRA contribution limit is $4,000  ($5,000 for those 50 or older).

In order to avoid these rollover mistakes, there are some guidelines you can follow. First, when rolling over your retirement distribution, you should consider a direct rollover. This eliminates the consequences of cashing out your plan. By having your former employer mail your distribution directly to your new plan custodian, you also limit the likelihood of violating the 60-day rule. (Often, this is called a trustee-to-trustee transfer.)

Financial Consultants do not offer tax advice. Please contact your tax professional.

Finally, consider talking to a Financial Consultant through DCU Financial. Our Financial Consultants can help you avoid common mistakes investors make, while helping you develop a strategic plan for the future. Regular reviews can help you keep on track and disciplined, as well as help you keep pace with changes in your personal circumstances and tax legislation that affect your financial situation. To learn more about DCU Financial or to schedule an appointment with a Financial Consultant, simply:

• Call us at 800.328.8797, ext. 6077

• Email us at financial@dcu.org

• Visit us at dcu.org

* Source: Bureau of Labor Statistics, 2005.
** Source: Hewitt Associates, 2005.

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