Broker Check


May 12, 2017

Our goal is to help you avoid making costly mistakes with your “old” 401(k).

A 401(k), for many Americans, is their biggest asset. Why is this? Well, pension plans are becoming rare. There were 113,062 pension plans in the United States in 1990. By 2010 there were only 46,543. That’s a 58% decline according to the US Department of Labor in November 2012.

There is much debate about the viability of the Social Security system, but what does this mean to you? Handle your 401(k) with care… It could be your main source or only source of income during retirement. Avoid these 9 critical mistakes with your 401(k) and you will be off to a good start.

Mistake #1: Taking the money and running

This is probably the biggest mistake that many younger investors make, as they simply cash out their 401(k) and spend the money. Many young people justify this by saying, “I could use the money to pay off debt, put a roof on my house, take my dream vacation,” along with a whole host of other reasons. The problem is that they are robbing themselves of their future retirement dollars. Plus, they’re likely paying additional taxes and possible tax penalties. The solution? Simple: Resist the urge. You can move it, just don’t spend it.

Mistake #2: Leaving your money in the 401(k) with your old employer

Three reasons why this can be problematic:

  1. You run the risk of giving up control. The old plan may change investment providers or investment options whether you like it or not.
  2. You are at the mercy of what your employer’s plan document says. Simply put, your 401(k) has certain rules that are governed by what is known as a “plan document.” The most common concern here may be the lack of an option for your beneficiaries to stretch your 401(k). This strategy allows beneficiaries to spread the tax burden of an inheritance out over their lifetime.
  3. People tend to forget about old plans. Worse yet, should you pass away, your beneficiaries may not even realize you own it.

Mistake #3: Executing a rollover instead of a direct transfer

Let’s assume that you’ve elected to move your 401(k) over to an IRA. You have two options as to how to move this money.

  • The Rollover is Option #1. You can have the company send you a check, made payable to you, and then you can send the new company the money. You have 60 days to reinvest the money. The problem is… Well, there are a few problems… The company is forced to withhold tax on this distribution, so you will only receive a check for 80% of the actual value. If you miss your 60-day window, you will be forced to pay taxes on the entire amount. Keep in mind, you are only allowed to execute this type of a move once a year.
  • Looking for a better option? Well, consider Option #2 – Execute a Direct Transfer. This is where you have your 401(k) plan send a check directly to your new IRA provider. This is much easier and cleaner and takes away the risk of missing your 60-day window and receiving that surprise 1099 in the mail. Oftentimes, this will require specific paperwork from your current plan provider.

Take note: Some employers may only offer you the option of sending the check to you. The best thing to do here is to have them make a check out to your new financial institution. This allows you to avoid the mandatory 20% withholding.

Let’s assume you’re moving the money to XYZ Company. Have the check made out in this format: XYZ Company, IRA Rollover, FBO Your Name. (FBO – that stands for “For the Benefit of”)

Mistake #4: The company stock monster

Holding company stock inside of a 401(k) is fairly common. However, there are really two concerns to consider with this:

  • Concern #1: Overweighting. Having too much exposure in any one company inside of your portfolio adds additional risk to your nest egg. No matter how strong you feel the company is, you may wish to reconsider just how much of your next egg you have exposed. Too often we read about situations such as this Remember Enron? A similar event happened with many Enron employees.
  • Concern #2: NUA. This is the big one. If you have company stock inside of your plan, pay very close attention. Before you touch your 401(k), be sure to review this with a qualified professional that understands what NUA is. NUA stands for, “Net Unrealized Appreciation.”Unlike other investments in your company’s retirement plan, shares of company stock may be eligible for special tax treatment after you leave your employer. This strategy can work in your favor more often than not, especially if you’re holding company stock that is highly appreciated

Here’s a quick summary of how NUA works. NUA is a strategy that allows investors to take advantage of potentially lower long-term capital gain rates. In return, investors can avoid paying typically higher ordinary income tax on the assets.

Let’s look at a quick example. You have worked for XYZ Company for 30+ years. Over the years, you have purchased XYZ stock and paid approximately $100,000 over that time frame. So $100,00 is your cost basis. Let’s assume that this has grown to $400,000 and that you are ready to retire. Rather than moving the $400,000 into an IRA and having to later pay ordinary income taxes on the entire amount, you could do a transfer “in kind” to a taxable account. This would require you to only pay taxes on $300,000 at long-term capital gain rates rather than at ordinary income tax rates. Only the original $100,000 investment amount would be taxed at your ordinary income tax rates. This could be very substantial tax savings.

Mistake #5: Failing to properly name beneficiaries

This seems so rudimentary, but it is a very common mistake. When it comes to your 401(k) and your IRAs, one of the most important things is how you completed your beneficiary form. Life happens. Loved ones pass away, second marriages may occur, kids from second marriages, new grandchildren, and on and on and on. So review it frequently to make sure you are going to be able to pass your money along the way you would like to. Furthermore, many people think that they should leave money to a trust account that they have established. While this may seem logical, oftentimes people don’t realize that they lose certain tax advantages for their beneficiaries if they do this. Also, be careful when leaving money to minors, as each state has certain limits of money that minors can have control of.

Mistake #6: Trying to recoup losses or chase performance

One thing that we know for certain, the stock market goes both up and down. If you happen to move your 401(k) during a market downswing, it is human nature to want to try to recoup your losses by investing more aggressively. Don’t let the emotion of a downward swing in the market allow you
to veer too far from your financial plan and your long-term vision. As you near retirement, you should consider becoming more conservative, not more aggressive. This money likely needs to last as long as you do.

Mistake #7: Burying your head in the sand about your retirement

If you are within 10 years of retirement, it is time to start the planning process. A crucial understanding of the two phases in one’s life becomes critical, accumulation and distribution. In sports terms, the first half of the game is accumulation. At some point, planning for the second half of the game, distribution, becomes critical. Devising a distribution plan is strongly recommended within 10 years of retirement.

Mistake #8: Forgetting about a loan

Treating your 401(k) as a personal ATM machine is usually a mistake in and of itself because you are robbing yourself of your retirement dollars and their ability to work hard for you. But forgetting about a loan that you took out can be an even bigger mistake. Let’s assume you have a 401(k) worth $300,000. A few years ago you took a loan out for $25,000 to remodel your house. Now you’re leaving your employer or your plan is terminated. If you were to forget about that loan and transfer your 401(k) to an IRA without paying your loan off, you will get whacked with a $25,000 1099 for that year in which you moved the IRA. Plus, if you are under 59-1/2 you may face an additional 10% IRS tax penalty. Ouch! This could throw you into a higher tax bracket and will certainly not help out your retirement.

Mistake #9: Doing it alone

Think of it this way … Building a retirement nest egg, similar to a real egg, takes time to create, nurture and develop; what we called the first half of the game. But also like a real egg, if not handled carefully, it can become cracked, broken or destroyed. Keep in mind, destroying your retirement nest egg can happen much quicker than the time it took to build.

The distribution phase is a bit different. You have the challenge of making this final paycheck you’re receiving, your 401(k) transfer, last you the rest of your life. For many, this can be a daunting task. There are some financial service professionals that focus specifically on the distribution phase in a person’s life. Many people fail to consider that they could be in retirement for 30 or 40 years. A strategic income plan carefully developed with a financial professional, may just be the thing that makes those 30 or 40 years the way you have envisioned them. Let’s face it: You don’t get a second chance at retirement.

Now, please take a moment to reflect and evaluate your current financial situation as it relates to what we have just discussed. Have you made any of these mistakes? Will you?

Let me finish by explaining the steps that we call, “The Financial Wellness Initiative Plan of Action.”

Step #1 – Please seek help from a qualified financial professional. Do not try and self-diagnose or operate on yourself.
Step #2 – Please take the time to meet with that professional for a financial physical or checkup.
Step #3 – Remember that a proper diagnosis must always come before any proper prescription.
Step #4 – A proper diagnosis should help identify the problems, not just the symptoms.
Step #5 – Help your financial professional by being open and honest. In other words, if you’ve had prior bad experiences let them know that. There are often other remedies or solutions. There could also have been a simple misdiagnosis or incorrect prescription made previously.
Step #6 – If a prescription is the best course of action, focus on what the prescription does and not on what it is called or named.
Step #7 – Understand the circumstance and the method for which the prescription is to be used.
Step #8 – Understanding that a common definition of “insanity ” would be “to change nothing and continually do the same things over and over, yet expect the results to somehow be better than they were before.”
Now, I have just two final parting questions that will indicate to you the value of the financial wellness consultation.

Important Question #1: Do you plan on living 5 or 10 more years? Well, whether or not you’re planning on it, Uncle Sam is planning on it. Here are the government’s life expectancy numbers based on age*:

  • If you are age 55 today, you may expect to live an additional 27.0 years.
  • If you are age 60 today, you may expect to live an additional 23.0 years.
  • If you are age 65 today, you may expect to live an additional 19.0 years.
  • If you are age 70 today, you may expect to live an additional 15.3 years.
  • If you are age 75 today, you may expect to live an additional 11.9 years.
  • If you are age 80 today, you may expect to live an additional 8.9 years.
  • If you are age 85 today, you may expect to live an additional 6.4 years.
  • If you are age 90 today, you may expect to live an additional 4.4 years.

Important Question #2: Would you be better off today if you had known all the things that you know now, including what you just learned in this discussion? If you are like most people then the obvious answer is, “Well, yes, of course, I’d be better off today.” Here is the purpose for asking this question – Our job is to help make sure that 5 or 10 years from now you don’t have to come to that same realization.
Here is the secret: The next 5 or 10 years begins today! That’s why we offer our no cost or obligation Financial Wellness Initiative Consultation. Please do not let procrastination and fear of change become your worst enemy.Similar to how a doctor may keep specific time open for new patients only, we set aside specific time open for you to take advantage of our Financial Wellness Initiative Consultation.

I think we’d all agree it’s unfortunate that many people ignore their financial future or spend very little time doing the things that they know should be done. Hopefully, we can help you in this area. Please, make it a priority to call our office. Thanks for reading today and good luck in your financial future.

So what’s the next step?

Your receipt of this report entitles you to a no cost or obligation one-hour session to review and discuss the potential beneficiary designation miscues from your accounts and the frustrations this can cause your heirs. Any customary hourly planning fees will be waived for this one-hour session.

What should you expect at this one-hour session? Below are some frequently asked questions about what we call the “59 Minute Personal Asset Management” consultation.

Q: What will this meeting consist of?

A: This meeting is simply an opportunity for you to ask any questions that you may have related to your beneficiary designations as well as your personal finances and retirement. Throughout the course of the meeting, we will take the time to talk with you and analyze your situation. We’ve found that everyone’s definition of a comfortable retirement is a little different in that everyone’s situation is unique. Our objective is to learn about your personal goals as we explore how to help you retire the way you want.

Q: Why do you offer this no cost or obligation consultation?

A: Simple. It gives us an opportunity to meet folks from around the area that may have questions about financial matters. It’s no secret that we would love new clients. Gaining new clients is the way that our business grows. However, we want to provide a comfortable, noninvasive environment for exploring a new, potential professional relationship – for you and for us. By offering an hour of our time for no cost or obligation, it provides a non-threatening way for us to spend some time with you to see if it makes sense for us to continue discussions into the future.

Q: Will there be a sales presentation?

A: Not at all. In fact, we are very hesitant to talk about any potential solutions to any questions or concerns you may have during our first visit. It’s important for us to understand your goals and desires about what “retiring” or “investing for your future” means to you. We feel it would be financial malpractice to begin exploring solutions prematurely. We tend to look at the first meeting as an opportunity for you to ask some questions, and for us to get to know each other. Furthermore, we can both be more informed by the end of the meeting, which will help determine whether or not it will be
advantageous for us to meet again.

Q: How long will the meeting last?

A: About 59 minutes. Most of our meetings are stacked throughout the day. Future sessions may require more time, but we’ve found that an hour, initially provides a good basis for getting to know a little more about each other.

Q: What will happen after the meeting?

A: If we both decide that it would be beneficial to meet again, we’ll schedule another time to get together. At that meeting, we would introduce you to the various areas in which our firm may be able to provide value to your situation. Again, we shy away from offering solutions at this point because we still consider it to be a discovery meeting. At that time, you should be in a better position to make an educated decision as to whether you wish to engage the services of our firm.

Q: What should I bring to the meeting?

A: We are sensitive to the fact that your personal financial information is just that – very personal. However, it is hard for us to help if we don’t at least have a fundamental understanding of your financial position. We ask that you bring information regarding your financial accounts and your previous year’s tax return. However, we follow a pretty strict policy of not looking at any of this until you are comfortable.

Q: Who should come with me?

A: We do ask that if you are married, you bring your spouse with you. If you wish to bring any children with you to the meeting, you are welcome to do so. For that matter, anybody that you may utilize in helping you with your retirement and personal finances is welcome to join.


About the Author

Martin McCann is president of McCann Asset Management and is a practicing financial advisor in Fresno, California. He focuses on retirement plans and wealth management.

Martin can be reached at 559-400-6520 or

Visit the McCann Asset Management web site at