Should You Roll Over Your 401(k) When the Market Is Down?

Deciding how to manage your 401(k) in a volatile market can be unnerving. The stakes are high – your retirement is on the line. So learning how to navigate deftly is essential, especially when examining crucial decisions like rolling over your 401(k). But, should you do it? Here’s what you need to know.

A financial advisor can help you create a financial plan to protect your retirement portfolio from a volatile market.

Should You Roll Over Your 401(k) in a Down Market?

For many investors, the answer is yes, provided the rollover aligns with their broader retirement strategy. A market downturn may feel like the wrong time to make changes, but the value of your retirement savings is likely affected whether the assets remain in your 401(k) or are transferred to another tax-advantaged account. If the rollover is completed as a direct transfer and your investments remain largely uninterrupted, short-term market declines alone generally aren’t a reason to postpone the move.

Instead of focusing on current market conditions, consider why you’re rolling over your account in the first place. If an IRA or a new employer’s retirement plan offers lower fees, better investment options or more flexibility, those long-term benefits may outweigh concerns about temporary market volatility. Conversely, if your former employer’s plan provides valuable features, such as low-cost institutional funds or favorable creditor protections, it may make sense to leave your assets where they are.

Regardless of market conditions, it’s important to avoid unnecessary disruptions during the rollover process. Choosing a direct trustee-to-trustee rollover can help keep your retirement savings invested and reduce the risk of taxes, penalties or extended time out of the market. If you’re unsure which option best fits your financial goals, a financial advisor can help you evaluate your choices and develop a rollover strategy that supports your long-term retirement plan.

Should You Cash Out Your 401(k) in a Down Market?

Retired couple analyzes their retirement savings accounts.

Cashing out your 401(k) in a down market is generally not advisable for several reasons. First, it can result in significant tax consequences and penalties. If you withdraw funds from your 401(k) before the age of 59½, you may be subject to a 10% early withdrawal penalty, in addition to paying regular income taxes on the withdrawn amount.

Second, selling investments in a down market locks in losses, potentially missing out on future market rebounds. The stock market historically experiences cycles of ups and downs and by cashing out during a downturn, you may miss the opportunity for your investments to recover and grow over time.

Instead, it’s often wiser to stay invested, maintain a diversified portfolio and consider strategies like rebalancing or adjusting your asset allocation to align with your long-term financial goals and risk tolerance.

How to Stop Your 401(k) From Losing Money

It’s important to understand that 401(k) investments can fluctuate in value due to market conditions, but there are strategies to help mitigate losses and potentially grow your retirement savings over the long term. Here are seven common ways to protect your 401(k) money:

Diversify your portfolio: Spread your investments across various asset classes like stocks, bonds and cash equivalents. Diversification can help reduce risk because different asset classes may respond differently to market fluctuations.
Determine the right mix of assets: Review your asset allocation to make sure it matches your risk tolerance and investment horizon. A more conservative allocation with a higher percentage of bonds or cash equivalents may provide stability during market downturns, while a more aggressive allocation with more stocks can offer higher growth potential at a higher risk.
Rebalance regularly: Review and rebalance your portfolio periodically to maintain your target asset allocation. Selling high-performing assets and buying underperforming ones can help lock in gains and reduce exposure to assets that may be overvalued.
Contribute to your 401(k): If possible, keep the same amount at regular intervals, regardless of market conditions. This approach helps you buy more shares when prices are low and fewer shares when prices are high, potentially lowering your average cost per share over time.
Avoid emotional decisions: Try not to make impulsive decisions based on fear or greed during market downturns. Keep disciplined and stick to your long-term investment strategy.
Review your investment options: Assess the investment options within your 401(k) plan regularly. Ensure they align with your goals and risk tolerance, and consider making adjustments if necessary.
Consult a financial advisor: Seeking advice from a certified financial advisor can provide you with personalized guidance and help you make informed decisions about your 401(k) investments.

Bottom Line

Husband and wife consider rolling over their 401(k) to a Roth IRA.

A market downturn can make a 401(k) rollover feel riskier, but short-term volatility alone shouldn’t drive your decision. Instead, focus on factors such as investment options, fees, account features and how a rollover fits into your long-term retirement strategy. By using a direct rollover and minimizing time out of the market, you can help preserve your retirement savings while positioning your portfolio to support your future financial goals.

Retirement Tips for Beginners

A financial advisor can rebalance your retirement portfolio to keep up with your goals during market volatility. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

SmartAsset’s Retirement Calculator can help you decide how much to save for retirement. Simply provide some details about your situation, such as your age, location, income, existing savings and planned retirement age. The calculator will estimate your annual retirement expenses and recommend a monthly savings figure.