Leaving your job? Don't forget your 401(k)
When you leave a job, you might want to take your retirement account out of your old company's plan. But when should you make the move?
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| Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005) |
NEW YORK (Money) -- Question: I'm in my 30's and have a 401(k) from a previous job, 75% of which is invested in a variety of stock portfolios. Although my stock holdings have recovered a bit recently, I'm still down about $7,000 from my peak balance. I'm planning to roll over this old 401(k) into either the 401(k) at my new job or into an IRA account, but I'm wondering whether I should do the rollover now while stocks are still cheap or wait until the market has recovered and then do it. What do think? --Todd Gerecke, Lynden, Washington
Answer: I've been getting a lot of questions lately from people who worry that poor timing when doing a 401(k) or IRA rollover -- or, for that matter, even transferring money from one taxable account to another -- might undermine their potential future returns.
But this angst is unnecessary. As long as you reinvest the money the same way after the rollover as you have it invested before the rollover, it really doesn't matter when you transfer it. The return you earn will be the same.
As long as you haven't changed how your money is divvied up between stocks and bonds, you're going to earn the same return regardless of where that money sits.
But just so there's no doubt, here's an example.
Let's say you've got $100,000 in an old 401(k) -- 75%, or $75,000, is invested in a Standard & Poor's 500 index fund while 25%, or $25,000, is in a total bond market fund. And let's assume that over the course of a year, stocks stage a rally and gain 20%, while bonds return a more modest 5%.
If you leave your money in the old 401(k), at the end of the year your balance would be $116,250 ($75,000 plus a 20% return equals $90,000 in stocks; $25,000 plus a 5% return equals $26,250 in bonds.)
If you then roll over your 401(k) balance at the end of that year to your new 401(k) or IRA, your new account will start with a balance of $116,250.
But what if, instead of keeping your dough in your old 401(k), you rolled over your $100,000 into your new employer's 401(k) or an IRA? As long as you reinvested 75% of the rollover proceeds in an S&P 500 fund and 25% in a total bond market fund, you would start out with the same amount in ($75,000) in stocks and bonds ($25,000), earn the same 20% return on stocks and 5% return on bonds, and end up with the same balance of $116,250.
So you end up with the same balance either way.
I didn't want to complicate things by throwing new contributions in. But as long as those contributions flowed in at the same time and went into stocks and bonds in the same proportion, they would earn the same return in either account, leaving you with the same balance either way.
Granted, there are a few factors that could change the result somewhat from what I've outlined here. If there's a lag period from the time it takes to move your money, then the balances you would have at the end of the year could differ.
But the difference could go either way. If the market went down while the money was in transit, you would be better off having moved the money since you would have missed at least part of the downturn. The opposite would be true if the market soared during that time. Either way, this isn't something you can predict in advance. And since it's purely a matter of chance, it shouldn't affect your decision.
Similarly, if you're unable to find the exact investments in your new 401(k) or IRA that you had in your old 401(k), then your return between the two options might also differ slightly. The same goes if there's a disparity in fees. But those differences could also work in your favor (if your new account has better performing investment options and/or lower fees) or against you (if the new account has inferior performers and/or higher fees).
In any case, neither of these issues -- the time it takes to do the rollover or the difference in investing options -- really pertain to the main issue here, i.e., whether you should do the rollover now or wait until the market recovers.
One other issue that people also wonder about in this type of situation is whether from a tax point of view it's better to hold off or move assets after your account value has fallen. But that's pretty much a non-issue too, regardless of whether you're dealing with tax-advantaged accounts, as in your case, or taxable accounts.
There is an issue you should be concentrating on, however. And that's whether to roll over your old 401(k) to your new employer's plan or to an IRA.
Either way can work. But, unless your new 401(k) plan has limited investment options or high fees, I think you're probably better off moving the money to your 401(k). It'll be easier for you to manage all your retirement money in a coherent way if it's in one place rather than spread out over different accounts.
One final note. When you transfer the money, be sure to have the administrator of your old 401(k) do it as a direct, or trustee-to-trustee, transfer to your new plan. That way, you'll sidestep the 20% withholding requirement for nondirect rollovers, and you'll avoid having to come up with 20% of your account balance to complete the rollover.
So go ahead and do your rollover whenever you're ready. There's no reason to obsess about the timing. 
