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Ask an Advisor: Should I Roll Over a Workplace Retirement Plan Such as a 401(k) to an IRA While the Market Is Down?

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Ask an Advisor: Should I Roll Over a Workplace Retirement Plan Such as a 401(k) to an IRA While the Market Is Down?Should I roll over a retirement account, such as a 401(k), 403(b) or 457(b), into an individual retirement account (IRA) when the market is still down? Should we wait until the market comes back up to its previous levels?

-Anonymous

There are a couple ways I could answer this question. One is, “Sure, if you want to.” Another answer is, “No, not unless you want to.” In other words, the timing of rolling over your 401(k) to an IRA actually does not matter. Here’s what to know.

Working with a financial advisor may help take some of the mystery out of investing for retirement. 

The Trouble With Timing a Rollover

Ask an Advisor: Should I Roll Over a Workplace Retirement Plan to an IRA While the Market Is Down?The mechanics of a 401(k) and an IRA are nearly identical. These are simply vehicles through which you invest your money. Granted, employer 401(k) plans are often limited in their investment options, while an IRA may not have that issue. But any given mutual fund or stock will perform identically in either type of account.

In other words, the market has no bearing on the question of an IRA versus 401(k). Still, I can see why you would consider the timing of a rollover to be important. The idea of beating or timing the market is so popular that it is easy to view timing any investment decision as more important than it really is.

Instead of trying to time the market, investors should focus on those factors over which they have more knowledge and control. Those include your savings timeline, risk exposure, short-term cash needs and overall retirement goals. To see why these considerations are more relevant, let’s review some key differences between IRAs and employer-managed plans.

Important Factors When Considering a Rollover

Ask an Advisor: Should I Roll Over a Workplace Retirement Plan to an IRA While the Market Is Down?Perhaps the most obvious difference between these investment vehicles is the scope of what they allow you to invest in. Employer plans limit you to whatever investments are offered by the plan administrator, while IRAs can use nearly any type of investment or security.

Some of the more nitty-gritty details are also important. Remember: Specifics may vary with other employer-managed plans like 403(b)s and 457(b)s. Here’s what to know about IRAs versus 401(k)s:

Maximum Annual Contributions (2023)

IRA: $6,500, or $7,500 for those over age 50
401(k): $22,500, or $30,000 for those over age 50

Additionally, in some employer-sponsored plans, the employer matches a certain percentage of your contributions with its own. If this is an option for you, it could be a game-changer.

Early Withdrawals

IRA: incurs a 10% penalty
401(k): incurs a 10% penalty and mandatory 20% tax withholding

Bankruptcy Protection

IRA: up to $1.3 million is protected in addition to rollover amounts from a 401(k)
401(k): balance is 100% protected, even after the rollover to an IRA

Loans

IRA: only permitted in the case of a 60-day rollover
401(k): plan-specific rules apply

Required Minimum Distributions (RMDs)

IRA: must start in the year in which you turn 72 or 73
401(k): If you are still working, the RMDs from your current employer’s 401(k) may be postponed.

Again, these differences have big implications for many areas of your financial plan. While the higher contribution limits of a 401(k) are very appealing, for example, they are of little use if you lack the discretionary income to exploit them. Conversely, the IRA’s relatively low penalty for early withdrawals sounds nice if you want more accessible funds. But consider whether that accessibility is really in your long-term best interest.

Answering such questions requires you to have a clear and honest view of your own financial situation. The big-picture vagaries of the market are perhaps more fun to analyze. But in this case, they are far less relevant. Worse, they may just distract you from the more personal and difficult – but ultimately valuable – analysis that a rollover decision demands.

What to Do Next

If moving your money from a 401(k) to an IRA is the right move for your financial plan then do it. The big-picture fluctuations of the market are less relevant than your personal financial situation. There’s no need to make things more complicated than they really are.

Tips for Saving for Retirement

  • There are many factors to consider when you’re planning for retirement, including how much money you’ll need, where you’ll live and if you’ll work. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • The first step in planning for retirement is figuring out how much you’ll need to save to live comfortably. Once you have a sense for what you need, you can adjust your savings and investments accordingly.

Graham Miller, CFP® is a SmartAsset financial planning columnist and answers reader questions on personal finance topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Graham is not a participant in the SmartAdvisor Match platform. Find more money insights from Graham at the Wiegand Financial blog

Tips for Handling Retirement Accounts

  • Industry experts say that people who work with a financial advisor are twice as likely to meet their retirement goals. SmartAsset’s free tool matches you with up to three financial advisors who serve your area. You can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Another easy way to save for retirement is by taking advantage of employer 401(k) matching. SmartAsset’s 401(k) calculator can help you figure out how much you will have based on your annual contribution and your employer’s matches.

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