Successful entrepreneurs and investors often pride themselves on their ability to “bootstrap” and just get it done, all by themselves. But sometimes that can get you into a lot of trouble. For example, the last thing you want to do is rollover your pension plan by having the money come directly to you.
Many of our clients are discovering that they can do much better with their investments than their so-called investment advisors can. They’ve learned that they can self-direct their funds into businesses and real estate. (They might have even learned that from one of my books, The Insider’s Guide to Tax-Free Real Estate.)
So far, so good. The first step is to take the funds from their pension and move them to accounts that can be self-directed. The problem is that they make one fatal mistake when they do the rollover. They take possession of the funds first. The custodian of the current fund is going to withhold 28% of the funds for taxes. But, the taxes aren’t due because you’re doing a rollover. So, eventually you’ll get a refund of the taxes withheld when you file your tax return for the year.
Still, you need to roll 100% of the funds within 60 days. That means that you have to make up the withheld taxes or risk penalties!
As an example, let’s assume that you have $10,000 in your old 401(k) fund. You want to roll it into a self-directed fund. You could call the custodian for the new fund and arrange for that company to make the roll, or (and this is the mistake) you could tell them to write you a check and you’ll handle the roll yourself.
You will get a check for $7,200, with $2,800 being sent to the IRS. But in order to avoid the penalties, you have to roll $10,000, so you need to cough up $2,800 fast.
This is one of those sticky problems that is so easy to avoid. Don’t try to roll your funds by yourself. Do it with the expert help of your new pension custodian.