Are there best and worst times to roll over a 401(k) into an IRA?

January 29, 2022 11:36 PM

I'm heading into a new job, and as part of that, I'm considering rolling my previous job's 401(k) into my IRA. However, the markets have been real tough in the past few months, and my 401(k) balance isn't looking great, just from a short term perspective. If I roll over now, am I losing money? If I waited for a market rebound, would I be in better shape? I guess I'd like to better understand the underlying mechanics of this kind of financial transaction.
posted by flod to Work & Money (8 answers total)

I can't tell you what is best for your situation, but I have just done something similar and decided to 'so what?' any potential losses from not 'timing' the market. In other words, I decided that because I can't time the market, I can't really afford to care. If I cared too much about something I cannot control, I am setting myself up for feeling failure.
posted by Thella at 1:18 AM on January 30, 2022 [2 favorites]

Best answer: No. Assuming that you are moving to a similar asset allocation in the IRA to what you have in the 401(k), the only downside is the possibility that the market goes up while your transfer is in progress. The money will likely be out of the market for a few days during the transfer, so you could miss out on market gains (or losses) during the transition. Since you are keeping it in a tax-sheltered account, there shouldn't be any tax implications.
posted by jkent at 2:41 AM on January 30, 2022 [14 favorites]

Your old 401k may also move to a different fee structure once you're no longer classed as an active employee, you would need to read the fine print of your plan.
posted by phunniemee at 6:07 AM on January 30, 2022 [2 favorites]

If your 401K are like most of mine have been, you are probably paying way too much in fees. Roll it over ASAP to Vanguard or Fidelity, and the savings in fees will easily offset whatever the market may do during the transfer.
posted by COD at 6:07 AM on January 30, 2022 [6 favorites]

Best answer: You should roll it over as soon as is practically possible. You will not lose money if you move it from stocks-in-your-401K to stocks-in-your-IRA. Yes, you will be selling low in your 401K, but then you will be buying low in your IRA.

It's important, though, to invest the money as soon as it gets into your IRA. If you move it out of your 401K into your IRA, and then you just let it sit in your IRA in a money market account, that would be bad. You would be selling low, and then not buying anything. You'd be out of the market.

You should get out of the 401K because they generally have very high fees and are inconvenient for you to manage. Plus, every time you change jobs you could have another 401K. You don't want those all sitting around. Just roll this one into an IRA, and next time you change jobs you can roll your next 401K into the same IRA. It simplifies your life.

Oh, and in the IRA you should buy low-cost index funds. 401Ks often have unusual, limited, expensive investment options (e.g. "Johnny Walker Mighty Growth Fund", things like that). You don't want to keep that going once you have your money in an IRA. Just invest in a low cost market index or two. Most of the money in stocks, some in bonds.
posted by Winnie the Proust at 6:40 AM on January 30, 2022 [2 favorites]

Best answer: You could ask your 401(k) provider if they can do roll-over transfer "in-kind". An "in-kind" transfer doesn't involve cashing out the assets in the 401(k) - they are transferred directly as stocks/mutual funds rather than as cash. Hence, the assets never leave the market, and there is no risk of having the value drop/gain due to market volatility during the transfer time. That said, I've only ever heard of one 401(k) that did in-kind transfers, and they only did them on-request with an additional charge.

There are at least two reasons to consider not rolling over the 401(k) to a IRA. Although in general 401(k)s tend to have poor fund selection, that's not always the case (for instance, my 401(k) offers Vanguard funds at institutional expense ratios that are lower than individual investors to get). Rolling over to an IRA is disadvantageous if:

• You care about lawsuit liability: 401(k)s are sheltered from lawsuits across the USA. The only party that can get access to your 401(k) is the IRS for tax evasion. In some states, IRAs have some lawsuit protection, but not all.
• Your income might exceed IRA income restrictions: high-income individuals who exceed IRA income restrictions often take advantage of a "backdoor Roth" conversion. Roth conversions are subject to the "pro rata rule". If you need to do a backdoor Roth conversion, having a Traditional IRA with any funds in it makes the conversion more complicated and less tax-advantageous. For instance, this is why I did a reverse roll-over - I transferred my IRA back into my 401(k).

posted by saeculorum at 8:05 AM on January 30, 2022 [6 favorites]

Nope. As long as it stays invested (minus a day or two in between accounts), you are not realizing any loss or gain. It's an even trade no matter what the absolute value of the market is that day. What really matters is what the value is when you use the funds to buy things like housing or daily life in 20-40 years.
posted by Dashy at 4:36 PM on January 30, 2022

Best answer: My wife did a 401k rollover from a crummy work plan to a Fidelity IRA. Fidelity accepted all of the 401k assets in kind - as saeculorum says. So, she kept all of the same assets and sold nothing - the assets just moved to Fidelity. You can call Fidelity or Vanguard (or any of the other big ones) and tell them that you want an in-kind rollover, they do it all the time.
posted by Mid at 5:38 PM on January 30, 2022 [1 favorite]