How Do You Plan For Retirement (Series): What to do with that 401k Rollover Check

How Do You Plan For Retirement (Series):  401k Check

“Bank error in your favor.”  You just received a huge check in the mail from your old 401k account.  What are you going to do with all that money?

Welcome to the latest in the, “How Do You Plan For Retirement ” series.  Today, we are going to discuss what to do with your 401k rollover check and give you step-by-step instructions on how to handle this.

In the past 13 years, I received two checks in the mail from my 401k plans.  The first check came in June of 2000.  I received about $1,800 from my 401k at State Farm.  I left the company in January and moved out of state.  Six months later, I received a check in the mail and did not know what to do with it.  I had some credit card debt, so I cashed it and paid bills.

The Price of my 401k Rollover Check Mistake

This mistake cost me in two ways.  First, I had to pay taxes on that money plus a 10% penalty.  At that time, I would have been in the 15% tax bracket, so I would have owed Uncle Sam 25% of $1,800 which amounted to $450.  Second, I would have lost the future investment value of that money.  Had my money stayed invested since 2000, I would have $1,739 dollars today and in 30 years when I retire, I would have just under $14,000.  (I used the Rule of 72 to Calculate this.)  That would have paid for a nice vacation in retirement (about $6,000 in today’s vacation dollars).

Thirteen years later, my current company was purchased by a large national bank.  We were notified that our current 401k was shutting down and we would need to roll over the money into an IRA or 401k by June 1st or we would receive a check.  I was wiser this time.  I called my Financial Advisor and we rolled my 401k into my IRA.   Old mistakes averted.  I had just under $50,000 in my 401k, so  I saved $17,500 in taxes (25% tax bracket + 10% penalty).  With 30 years until retirement, that $50,000 should double at least three times according to the Rule of 72, yielding me $400,000 in retirement.

Step-by-Step Guide When You Receive a 401k Rollover Check

What should you do when you receive a 401k rollover check in the mail?  From my story above, it is clear that you should not spend the money.  Instead, do the following:

  1. Call your advisor the minute you know that you will be receiving a check.  By calling your advisor right away, you are not tempted to spend the money.  You won’t think about building a pool, going on vacation, buying a new car, or a larger home.  Second, your advisor can call your old 401k company with you and guide you through the call.  After the call, your advisor will send you a postage paid envelope so you can send the check to him the minute you receive it.
  2. Work with your advisor on your investment mix and determine if you are going to use dollar cost averaging to invest your funds.  Note that if you are rolling over funds from a fully invested account, dollar cost averaging may not be necessary.
  3. Ask your advisor for discounts.  Rollovers are nice windfalls for advisors, so they can offer up some discounts.  Some common discounts are to waive the yearly account fees or to provide you with a letter of intent.  A letter of intent says that you plan on investing X amount of dollars in the next 13 months in order to reduce your sales charge.

Thank you for joining us for the latest post in the series, “How Do You Plan For Retirement.”  If you have any questions you would like answered in this series, please post your question in the comments below.

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