Rolling over a 401(k) to an account you own is a good idea, but the getting the timing right is important too.
(This is not financial advice. Please see my Disclosure Policy.)
I was talking with a previous client of mine the other day about rolling over a 401(k). Specifically, the best time to rollover a 401(k), and if there is any impact to rolling over a 401(k) when the market is down (or up).
It was a good question. I’d tackled the benefits of rolling over a 401(k) in a previous post, but had never really talked about the timing aspect.
(And note that I’m referring to all workplace arrangements here, such as the 403(b), but am using the “401(k)” term as shorthand.)
So is there a good (or bad) time to rollover a 401(k)? When is best?
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Timing the market
There is one rule about timing the market: You can’t time the market.
So right off the bat, if you’re thinking about the timing of moving your money, you’re already off on the wrong foot.
Here’s why. The amount of time that you’re going to be “out” of the market with your investment money is going to be minimal at best (a few days to a few weeks), which in the long term shouldn’t result in you losing out on any massive turns in the market.
To see more about how this works, let’s imagine a typical scenario, which is rolling over a 401(k) to a self-directed IRA.
The only way to do a rollover that doesn’t seriously impact your funds is to do a direct transfer.
This means that your positions in your 401(k) will be liquidated, and the money will be sent to your new account’s servicer, wherein it will be deposited as cash.
(As an aside, it’s a bummer that the two servicers can’t get it together to keep the same positions as you had before, by buying the exact same, or similar, funds. But I’m sure there are regulatory as well as logistical headaches that make that not feasible.)
Anyway, once the funds are in your new account, you can purchase whatever funds you wish.
Because your originating account is tax-sheltered, this means that you don’t pay capital gains tax when you sell. So there’s no tax penalty for moving your money, apart from the few days or few weeks that your money is not invested in anything.
Nothing is absolute here, and your specific situation may vary. So here are some caveats to watch out for:
- Sell fees: I assume that your 401(k) doesn’t have any penalties for selling (or closing out your account), but you definitely want to check this. Depending on the fees you pay, that might impact your timing.
- Vesting time: It’s also possible that your funds may be on a vesting schedule such that keeping your funds in your 401(k) might be a good idea. You don’t want to lose money coming to you because you were in a hurry to roll it over.
- Roth conversion: I’m assuming that you’ll be doing a like-for-like direct transfer. This means that a 401(k) will rollover into a Traditional IRA, and a Roth 401(k) will rollover to a Roth IRA. If you’re going to rollover pre-tax funds into a Roth IRA, then there are massive tax implications here, and it will cost you money. If I were you, even if I were thinking of doing the conversion, I’d do in in a separate step: rollover now, conversion later.
Own your money
But as far as I can tell, none of these caveats (or any others) have anything to do with what the market is doing.
Rolling over to an IRA, in most cases, will give you more options, lower fees, and greater flexibility. Once you’ve left your job behind, there’s usually no good reason to leave your money there either. The best time to rollover your 401(k), with few exceptions, is now.