The $170 Billion Rollover Mistake: Is Your Retirement at Risk
As you approach retirement, two critical aspects of financial planning often get overlooked: properly managing account rollovers and implementing proactive tax strategies. While many of us have diligently saved in our 401(k)s and IRAs for decades, simple oversights in either area could cost you thousands in retirement wealth.
During this episode of RichLife Retirement, Melissa Kennebrew, Bruce Steinbrock and I are discussing:
✅ The common 401(k) rollover mistake** that could leave your money sitting idle for years – and how to avoid it
✅ Why standard tax preparation isn’t enough – and how proactive tax planning could save you tens of thousands in retirement
✅ The critical difference between moving your money and making it work for you
✅ Real strategies you can implement before year-end to help manage your tax burden
✅ Why getting tax advice from friends, family, or social media could cost you dearly
The $170 Billion Mistake
According to Vanguard’s research*, 28% of savers still had their rolled-over funds sitting in cash even seven years later. This simple oversight is costing investors a collective $170 billion in lost retirement wealth annually. It’s not about investment sophistication – even experienced investors can make this mistake simply by not completing the final step of reinvesting after a rollover.
The Cash Trap
When you initiate a rollover from your 401(k) to an IRA, the funds are typically transferred in cash. It’s then up to you to reinvest that money according to your retirement strategy. The danger lies in leaving these funds uninvested, missing out on potential market gains and the power of compound interest.
The Tax Planning Connection
While managing rollovers effectively is crucial, equally important is implementing proactive tax strategies. As tax expert Melissa Kenebrew emphasizes, there’s a critical difference between tax preparation and tax planning. Many retirees focus only on annual tax filing, missing opportunities to save tens or even hundreds of thousands of dollars over their retirement lifetime.
Avoiding the Rollover Pitfall
To protect your retirement savings from the rollover mistake:
- Have a Clear Investment Plan Before initiating a rollover, develop a strategy for reinvesting the funds that aligns with your retirement goals and risk tolerance.
- Act Promptly Once funds reach your IRA, reinvest them immediately according to your plan. Don’t let them sit idle in cash.
- Consider Professional Guidance Work with a financial advisor who can guide you through the rollover process and help develop an investment strategy aligned with your goals.
Critical Tax Planning Opportunities
As year-end approaches, consider these tax-saving strategies:
- Maximize HSA contributions if eligible
- Review retirement plan contribution limits
- Compare current pay stubs to last year’s tax liability
- Evaluate Roth conversion opportunities
- Position yourself strategically within tax brackets
Beyond the Basics: Key Planning Areas**
Required Minimum Distributions (RMDs): If you retire around 65, you have a 10-year window to manage these distributions strategically. Without proper planning, your pre-tax money could double, creating twice the tax problem. You might be forced to take distributions you don’t need, regardless of market conditions, and pay taxes on money you don’t require.
Roth Conversions*: Consider strategically converting traditional IRA funds to a Roth IRA during years when your tax rate might be lower. This can provide tax-free income in retirement and help manage your overall tax burden.
Beneficiary Designations: A Cautionary Tale The importance of keeping beneficiary designations current was illustrated by Dan, a hospital worker who failed to update his 401(k) beneficiary after remarrying. Despite updating his will to name his new wife Kim as sole beneficiary, his outdated 401(k) beneficiary designation resulted in his ex-wife receiving $500,000 while his wife of 30 years received nothing.
The Power of Proactive Planning
Success in retirement isn’t just about how much you save—it’s about how effectively you manage those savings. By avoiding common pitfalls like the rollover mistake and implementing proactive tax strategies, you can significantly increase your chances of a comfortable and secure more confident retirement.
Remember, retirement planning isn’t a one-time event. It’s an ongoing process that requires regular review and adjustment. By staying informed and working with trusted professionals, you can navigate the complexities of retirement planning with confidence.
Taking Action
Don’t leave your retirement to chance. Start with a comprehensive RichLife Retirement Review to assess your current situation and identify opportunities for improvement.
Text RRR to 877-731-7424 to schedule your complimentary review and ensure your retirement strategy is working as hard as you are.
To connect with Melissa Kennebrew of MBK Financial Services, visit
https://mbkfinancialservices.com/
https://www.facebook.com/MBKFinancialServices/
https://www.instagram.com/mbk.fin.svcs/
We Want To Know
Have you reviewed your retirement strategy recently? What steps are you taking to ensure your savings are working as effectively as possible? Reach out and let us know – info@richlifeadvisors.com
REFERENCE: *Vanguard – The “Sticky” IRA Cash Trap
https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/sticky-ira-cash-trap.html
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Disclaimer: RichLife Advisors is not associated with or endorsed by the Social Security Administration or any other government agency. Maximizing your Social Security Benefits assumes foreknowledge of your date of death. If as an example you wait to claim a higher monthly benefit amount but predecease your average life expectancy, it would have been better to claim your benefits at an earlier age with reduced benefits. Investment advisory services offered through Fiduciary Capital, Inc., a state registered investment advisor.
** RichLife Advisors does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstances.
Investing involves risk, including possible loss of principal. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company.
*Converting an employer plan account or Traditional IRA to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including but not limited to, a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.