Should You Rollover a 401k When the Market Is Down or Up?
- Depending on how you have diversified your account assets, your investment portfolio generally performs in line with the overall market. Regardless of values that rise or fall, if you sell your 401k assets to reinvest in a similar portfolio, you're merely swapping one investment for another similarly-priced investment. When you sell your investments to buy a new car, however, you are definitely locking in a gain or a loss. Your rollover choices should depend on factors such as investment choices, your investment time frame and account fees. Your savings can recover value in an IRA just as easily as in a 401k, or more easily if you choose your IRA options carefully.
- If your 401k plan allows you the option of keeping your funds in the plan, do some homework before making your decision. Compare the investment choices in your 401k plan with your IRA options. In most cases you have far more choices with an IRA, ranging from stocks and bonds to any number of mutual funds. Most 401k plans limit your choices. Look for information about annual account fees and investment management fees. If you can find an IRA with no annual fee, and you invest in low-cost funds that eliminate one percent in management fees, the savings will compound with your earnings as the market rebounds.
- A 401k rollover usually does not occur overnight. Your 401k plan must sell your investments and settlement for the sale can take up to three business days. In addition, many plans have other processing procedures, so it's difficult to know when the funds will transfer to your IRA. In the best case, the transfer occurs in less than a week. Some transfers, however, take a month or more. Stay in touch with your 401k plan administrator to track the progress of your transfer. Have a reinvestment plan in place so your funds are directed to your choice of investments as soon as the new custodian receives the transfer. Talk to a financial adviser about an appropriate allocation for your goals. Since you don't have a crystal ball and cannot control short-term market fluctuations during your transfer, focus on the more powerful secrets to long-term investment growth --- investments spread over a variety of asset classes and regular savings.
- You can contribute to your IRA just as you contributed to your 401k. Once you have rolled over the 401k, keep building your retirement savings by making monthly contributions. In 2010 you can contribute $5,000 each year, $6,000 if you are age 50 or older. Contributions must be made from earned income. For example, to make a full $5,000 contribution you must also earn at least $5,000 for the IRA tax year. Invest while the market is low to take advantage of the buy low, sell high concept. Set up monthly contributions to your IRA to achieve more consistent growth toward your retirement goals. Since the market fluctuates daily, some months you will invest at a lower price and others at a higher price, but the discipline to invest during all market conditions will help you meet your retirement goals.
