Paws Before you Rollover to Avoid the Retirement Doghouse

In Warren Buffet’s 2023 letter to Berkshire Hathaway shareholders the ‘Oracle of Omaha’ had one piece of sage advice I want to tackle in a series of blogs.

“One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital. Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been - and will be rewarding- if you make a couple of good decisions during a lifetime and avoid serious mistakes.”

Serious money mistakes to avoid #1: The Unintended 60-day Rollover[i]

Unfortunately, when it comes to long term financial planning, decades of doing the right thing can be erased in an instant by a single mistake. People tend to ignore this and focus on trying to hit home runs or get rich quick, which - guess what - increases the likelihood of making a single big mistake.

Most big financial mistakes are consequences of human nature; our survival instincts do not translate well to long term investing. The unintended rollover however is a problem of jargon. The taboo around talking about money and the endless sea of terminology make it easy for someone to unwittingly mess up when trying to consolidate retirement accounts.

The Rollover; is a term that means something very specific, but is sometimes used broadly to describe consolidating retirement accounts. A 60-day Rollover is when you take money out of one retirement account and intend to put it into another within 60 days. This can be risky because there are specific rules you must follow, and you could end up losing money to taxes.[ii]. Perhaps you’re consolidating old 401ks into your current employer or rolling over funds from a 401k or 403b to an IRA. 

60-day rollovers are generally not the best option. This is not to say anything about consolidation, but to say that better options to consolidate usually exist. The 60-day rule, or the “IRA one-rollover-per-year rule”[iii] limit flexibility and increase the chance of making a mistake.

Some employer’s plans also have mandatory withholdings on rollovers which could trim 20% or more off your entire retirement sending it right to Uncle Sam!

There’s got to be a better way!

There is.

Instead of a 60-day rollover, it's usually better to do a direct rollover [iv] or a trustee to trustee transfer[v]. These will not be subject to withholdings, have no 60-day rule and no one per year rule.

Instead of having a check to John Doe that needs to go into another retirement account within 60 days, have a check made directly to the new account FBO (For the benefit) of John Doe, it seems like semantics, and it is, but messing this up can be catastrophic.

Failure to complete the Rollover within 60 days could result in up to the entire amount being taxable and also comes with a 10% penalty unless eligible for an exemption.[vi]

When deciding if it makes sense to consolidate your retirement accounts it is important to understand your options. It is always important, and especially in this case, to understand the costs and the benefits of your different options.

Whenever you are working with a financial advisor there should be clarity on how the advisor is compensated.  Sure, an advisor might make more money if you consolidate your old retirement accounts to be managed by the advisor, and you should know that. It still could be in your best interest depending on the level of service you want and what the advisor is providing. Discretionary management of an investment account will usually come with costs but may also come with access to a wider investment selection, or lower cost institutional share classes, as well as other services.

There’s also a huge potential value in having an expert have visibility across all your investments. Siloed accounts might look fine individually but could be much riskier or much less diversified than you realize. Whenever we manage any of a client’s investments we want to be aware of their entire financial picture. Knowing your goals, timelines, priorities, worries, values, and risk tolerance allows us to tailor your portfolio and our advice.

The "best" investments are irrelevant without a plan you can stick to.