The Disadvantages Of An IRA Rollover
Most Americans go through several jobs in their lifetime. Unlike people from developing countries that tend to have a minimal number of jobs throughout their lives, Americans tend to jump from job to job.
Why not? In many cases, you end up making a lot more money if you jump into the right job. In another case, you get to live in a better city when you relocate for a new job. Regardless of the reason, more Americans have a higher level of mobility when it comes to employment compared to most parts of the world.
One of the critical disadvantages of such occupational mobility is that you open many different retirement accounts with each job. If you go through several positions, you might have several retirement accounts with other employers.
By law, you have to roll over these accounts, or you might be penalized. It is always a good idea to open an IRA rollover account so you can rollover all these other IRAs into a central IRA account. However, as much as it is a superb idea, you have to consider certain factors that may act like disadvantages if you do not work around them. You have to be aware of these other factors to be pro-active in making sure that you get full benefits from your IRA rollover.
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A large number of potential investments can overwhelm new investors
If you have an IRA, there are many different investments you can put into it. This diversity and this sheer number of investment options can be frankly overwhelming to people who are not familiar with investing. Suppose you are quite unclear about your investment options. In that case, it is a good idea to take some time and put in the effort to learn everything you can regarding IRA rollovers, investment options, and managing your investment portfolio.
You have to remember your IRA rollover is self-directed. In other words, you make the call regarding the investments that you put into your account. There is no professional fund manager that will call the shots for you.
This can be a severe issue if you read message boards or blogs that push certain investments, and it turns out to be bad investments. So it is a good idea to slow down a little bit once you have an IRA rollover account set up to get a clear picture of the disadvantages of an IRA rollover and your work around them. Chief among them, of course, is confusion regarding potential investments.
Frequent trading costs
It is too tempting to be a micromanager of your funds. In other words, once you started your IRA rollover account, it is also easy to make a trade on a day-to-day basis. The problem with handling your portfolio this way is that you pay a fee every time you trade.
The more you trade, the more fees you have to pay. This can increase your frictional costs. This is a severe problem because frictional costs reduce your total return on your investment. If you are active enough and are micromanaging your funds, you might lose track of how much actual money you are gaining and fail with every trade. If this sounds strange, you would be surprised as to how common this problem is.
Thanks to modern computerized trading, people trade off their laptops and tablets all the time, and the more they trade, the more they manage their accounts, the higher their potential costs in terms of fees. This is one of the disadvantages of an IRA rollover account you need to keep an eye on. This can erode your portfolio's fractional increase.
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You can only take advantage of the rollover IRA once each year
One of the most significant disadvantages of an IRA rollover account is that you can only take advantage of it once every year. You have to time your moves correctly. You have to look at your different investment options and your investment situations so that they can line up to that particular window where you can rollover your IRA.
If you make a mistake, you have to wait until next year to be protected by your IRA. You have to remember that people use and open IRAs because it protects them from taxes. Instead of all your income being taxed now, you can reduce your payment by the amount you put into your IRA.
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Has only sixty days to complete the process
Another strategic disadvantage of an IRA rollover account is that you have sixty days to complete the process of rolling over your accounts. If you are in a situation where funds will be released over a quarter or half a year, you might have to time your movements correctly.
You might have to time your financial decisions on a year to year basis. Otherwise, you might not be able to put all this money into an IRA rollover since you have sixty days to complete the process. You have to be very careful with timing, as mentioned above, because whatever advantages that you are getting might quickly turn into disadvantages if you do not watch what you are doing. You have to be very conscious, systematic, and organized regarding your moves.
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Missed deadlines will incur substantial taxes
Of all the different disadvantages of an IRA rollover, the most painful is the tax hit that you will take if you miss the windows of opportunity listed above. Due to timing issues or just bad luck, you might have to pay higher taxes.
This is why it is imperative to consider the different disadvantages of an IRA rollover to establish a concrete timeline based on your financial records and financial dealings in any given year. If you look forward to, in all likelihood, what you will be doing in terms of investments in a single year, you can then plan it out based on an IRA rollover schedule and calendar. This way you can dodge many, if not all, of the disadvantages of an IRA rollover account.
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