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The Four Most Forgotten Financial Mistakes

By:  James P. Norris, MBA, APMA®

As a financial advisor I see many people in all areas of life. What astounds me is that no matter where people are in their financial journey, the same common mistakes seem to exist. The goal of this article is to highlight what I have found to be the Four Most Forgotten Financial Mistakes, and to help you to not make them. I know that you will enjoy this article and I look forward to the opportunity of discussing your financial journey.

1 The Forgotten 401(k)

Changing jobs can be exciting and often times it means more money for you. However, the way in which you choose to deal with your old 401(k) can cause you to lose considerable amounts of your hard-earned retirement savings. In order to make the best decision for you and your retirement, you must understand all of your options and how they will affect your retirement.

Option 1: Cashing Out (Worst Option)

This is a very common option, especially for people who haven't accumulated that much in their 401(k). They think that it isn't a large amount, so they might as well cash it out, and use the money for something else. However, this is a very EXPENSIVE option! When you cash out a 401(k) plan, the check is made out directly to you, which triggers a 20% federal tax withholding by the employers, which is required by law. On top of that, if you are under the age of 59 ½, you will pay a

10% IRS penalty on the gross amount. Furthermore, if you are in a higher tax bracket than 20%, you will have to pay the difference, as well as state and local taxes when you file your return. Also, it is extremely important to understand your plan's vesting rules. If you haven't worked there long enough to be fully vested, your employer will retain any unvested amount. To illustrate this option, let's look at an example of a 401(k) worth $40,000, fully vested, and under the age of 59 ½ and in the 31% tax bracket, and state and local taxes of 5%…

         Gross Amount                     $40,000
         20% Federal w/h                 $ 8,000
         10% IRS Penalty                 $ 4,000 
         11% Fed Tax Difference     $ 4,400
         State & Local Taxes            $ 2,000
         Left Over Amount               $21,600

By cashing out this 401(k) plan, you've been left with only 54% of you hard earned retirement savings...hardly an option at all!!

Option 2: Leave it (Still a Bad Option)

First of all, most employers will require a minimum balance of $5,000 in order to leave your 401(k) once no longer employed. When people choose this option, it is usually not a thought out choice; it is the result of not wanting to hassle with it or simply forgetting to do something about it. When it comes to your retirement savings, "procrastinating" and "forgetting" are words you cannot afford to use. When you leave a 401(k) behind, you will inevitably forget to manage it as well, thus leaving a static portfolio that is not changing as the market changes. Also, many employers pay up front management fees associated with the plan, and once you are no longer employed, those fees could be your responsibility to pay. Lastly, you must deal with the problem that all 401(k) plans have, which is limited investment choices. 401(k) plans only give you a selection of investment options that you must choose from, and in many cases they require you to have a certain portion of company stock, which once you are unemployed you may not care to own. Obviously with this option, you avoid paying any taxes or penalties; however, you pay a high opportunity cost of not being able to direct your retirement savings as you wish…not an option in any case!

Option 3: Rollover into new Employer's 401(k) Plan (Best Option So Far)

At least this option consolidates your retirement savings; however a common mistake occurs when people chose this option. As mentioned previously, if you have the check made out to you, your previous employers will withhold 20%, causing quite a conundrum. In order to execute a full rollover, you will have to come up with the 20% difference on your own, as well as complete the rollover within 60 days in order to avoid taxes. You will get the 20% back when you file your tax return, but it cost you having to come up with the 20% difference, as well as essentially causing you to give the government an interest free loan, and who wants to do that? That mistake is easily avoidable by having the check correctly issued; however, even if you avoid that costly mistake, you are still left with constricted investment universe. As previously mentioned, 401(k) plans have a very limited amount of investment options for you to choose from, and they may not line up with your investment goals. Why limit yourself to so few options?...hardly an option!

Option 4: IRA Rollover (Now You're Thinking!)

You can avoid paying any taxes or penalties and still benefit from tax-free growth, all while giving yourself greater choices of investment options, by rolling over your old 401(k) into an IRA (Individual Retirement Account). You could still have the issue of the 20% withholding as described in Option 3, so you will want to be sure to check with your advisor to transfer it appropriately. With a Rollover IRA, you can essentially invest in any stock, bond, mutual fund, ETF (Exchange Traded Fund), annuity, REIT (Real Estate Investment Trust), or even purchase personal real estate. You cannot put a value on giving yourself the flexibility of so many investment options. This option also gives you the control over the cost structure in which you chose to invest. Whether you go it alone, or choose to work with a professional, an IRA Rollover is most likely your best choice. Working with a financial advisor gives your retirement plan the expertise it needs to meet your investment goals. A financial advisor can also assist you in the process of executing the rollover, which can often times be a nightmare with your old HR department. Working with the right advisor, someone you can trust, can be the best decision you could ever make when it comes to your retirement.

I hope you see the potential benefit of doing an IRA Rollover with your old 401(k); call us today to make this happen, your retirement cannot wait!

2 The Forgotten Insurance Plan

Unfortunately many people don't think about life insurance until either it's too late, or it's too expensive. The simple fact is that insurance solutions, when thought about early enough, can be very affordable and very efficient. You may be thinking that you don't need life insurance; but answer these questions: Are you married? Do you own a home? Do you have children or planning on having children? If you answered yes to any of those questions, than there is absolutely no reason that you should go a day more without the proper life insurance coverage. Many people are offered free or discounted life insurance through their employer, and they feel that is enough. However, in most cases, the insurance provided is not enough and terminates once you leave that employer (and who knows if you'll be insurable at that point.) Also, the "discounted" premiums are often not the most competitive pricing out there, which means you could be getting a better price or more coverage.

There are many insurance options out there and it can difficult to choose the right type for you and your family. Call us today to discuss your insurance needs and don't wait any longer to protect your assets and your family!

3 The Forgotten College Plan

If you have kids, and you are banking on saving later, or on them getting a scholarship, you are making a mistake. Let's assume you save $100 per month ($50 every paycheck; paid twice a month) for 18 years, at an assumed rate of 10% year. Your college savings at the end of 18 years would be an astonishing $ 57,640. If you waited until your child was in high school before saving, you would need to save $ 982 per month to reach the same result, and achieve a 10% investment return over the four year period, which is much more difficult to achieve.

The costs are going up!

Data provided by The College Board's "Trends in College Pricing 2009" shows that the average yearly increase in tuition, room and board, is 6.4% per year for the last ten years. The same study, estimates (as seen below) the current in-state tuition for a four year public school is $15,213 per year.

U.S. Undergraduate College Costs for 2009-10 School Year


Tuition and fees

Room & Board


Change from 2008-09

Public 4-Year (in-state tuition)






Public 4-Year (out-of-state tuition)





Private 4-Year





Source: College Board's 2009 Trends in College Pricing,

So if you had a child today, you could reasonably expect to pay $46,469.09 ($15,213 at 6.4% inflation for 18 years) per year for his/her private college education. Are you ready for that?

Don't wait to save for your child's education, start planning today and let me help guide you to the right college savings plan for you. Call us today to begin your plan!

4 The Forgotten Estate Plan

The main goal of estate planning is to protect and manage your estate if you die or become disabled. Most people postpone estate planning until they are older, assuming that there is no need until then or they're hesitant due to the belief that is overly complicated or expensive. In fact, establishing a well designed estate plan doesn't have to be overly complex or expensive.

Below is a list of a few things that are essential in establishing an estate plan and you might be surprised to know that obtaining them can be very cost efficient. It is very common for me to come across clients who have never even thought about getting these documents in order regardless of their ease to establish.

Estate Planning Essentials – Regardless of Your Estate Size

 Last Will & Testament or a Living Trust

 Pour Over Will for those with a Revocable Living Trust

 Durable Powers of Attorney over Assets

 Durable Powers of Attorney over Health Care

There are many other estate planning tools that exist and it depends on your estate as to which ones are needed for you. The most important thing to remember when establishing your estate plan is to get the right advice. Getting the right advice all depends on working with the right professionals. At our office, we pride ourselves on having all the right professionals at your disposal.

It is essential to have a professional team in place involving attorneys, CPAs, and most importantly your Financial Advisor who is the head of your team. That is exactly what our office does for our clients; call us today to begin reviewing and establishing your estate plan!


LPL Financial offers no tax or legal services or advice.

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