When moving funds from an old 401(k), instructing the provider to do a 'direct rollover' is crucial. If they send a check to you personally, the IRS considers it a taxable distribution, triggering mandatory withholding and penalties.
The difficulty in building an emergency fund isn't just about discipline; it's exacerbated by traditional bank fees that penalize low balances. Unexpected charges can derail progress, making fee-free banking a critical component of financial stability for many.
A common mistake after a 401(k) rollover is assuming the money is working for you. The funds often arrive in the new IRA as uninvested cash. You must manually select investments to ensure the capital continues to grow and doesn't lose value to inflation.
When converting a pre-tax 401(k) to a Roth IRA, you owe income tax on the entire amount. To preserve your principal, pay this tax bill from a separate savings account. Using the retirement funds to pay the tax permanently reduces the base for future compounding.
If a former employer has gone out of business, your old 401(k) isn't necessarily lost. You can use free resources like the National Registry of Unclaimed Retirement Benefits and the Department of Labor's database to track down these abandoned accounts.