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Three More Reasons To Not Rollover Your 401(k)

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401(K)When you leave your job, one of the decisions you may have to make is whether or not you should rollover your 401(k) into a Rollover IRA. The process of rolling over your 401(k) is easy, so don’t let that be a deterrent, and the benefits of rolling over your 401(k) can be pretty substantial. However, it’s not always correct to rollover your 401(k). It was the subject of my Devil’s Advocate post on why you shouldn’t rollover your 401(k) but I thought of three more excellent reasons why you might want to avoid, or at least put off, rolling it over.

You Can’t Stay On Top Of The Process

When you rollover a 401(k) into an IRA, the process is simple but you have to stay on top of it. With how chaotic things have been lately, whether it’s the market or with your job, the biggest thing to keep in mind is that you need to be able to complete the process without losing anything. The whole thing should take less than two weeks but if you misplace the check or otherwise forget to make the deposit, you could be in for even greater headaches.

You Can’t Borrow From An IRA

The biggest reason why you shouldn’t rollover your 401(k) into an IRA is because you can borrow from a 401(k) and you cannot borrow from your IRA. With the 401(k), you can borrow funds and pay yourself back the interest. The loan is not as awesome as it sounds, since your money won’t grow (or fall, given our current stock market!), but a 401(k) loan may be better than many other types of loans out there. With an IRA, you can’t borrow from it at all. There is a small loophole that will give you what is effectively a 60 day loan (when you rollover the IRA from one account to another, you have 60 days to deposit the funds, so it’s effectively a 60 day loan) but not something you want to use if you aren’t sure if you’ll be able to pay it back (if you don’t deposit it within 60 days, it’s considered an early withdrawal and subject to taxes and penalties!).

Volatility

One downside of the rollover process is that your 401(k) plan administrator will usually mail you a check that you have to mail to someone else. It takes a few days to cut the check, it takes a few days to make it to you, and then it takes a few days for you to mail it to your IRA. A lot can happen in that approximately ten business day window, your retirement assets are frozen in time until you get them back in. If the market falls tremendously, you will be happy; if the market jumps tremendously, you’ll be furious. A good way to see when volatility has gone down is by looknig at the VIX, a measure of the trader’s estimate of the market’s volatility over the next 30 days. The higher the number, the more volatile. The current VIX is somewhere in the 50s, which is less than the highs in the 80s several months ago, but more than the 10-20 range it had the last few years (the last time the VIX was this high, it was the dot com boom and bust). Unless your 401(k) is atrocious in fees, which it probably isn’t, or you have some compelling reason to rollover, I’d hold off until the market calms down… whenever that is.

Whether you rollover your 401(k) or wait, either option is better than cashing out.

(Photo: urbandata)

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10 Responses to “Three More Reasons To Not Rollover Your 401(k)”

  1. Neal Frankle says:

    Jim,

    I see your points here but I respectfully disagree.

    1. The process can be long but its usually not. In fact, lately I’ve been surprised at how quickly the process is completed.

    2. For most people, not being able to borrow against an IRA is a huge benefit. My experience tells me that the reason folks have most of their savings in an IRA is precisely because they can’t borrow from it.

    3. Volatility. Yes, this is true. Your money is “on the dark side of the moon” for a few days. The longest I’ve ever seen this take is 10 days and that could hurt an investor – but it could also help someone. Its 50-50.

    When I look at all the pros and cons, I see the rollover as a no-brainer. But I do see your points. Thanks for a very important topic.

  2. Travis says:

    Those points are good but if your goal is to make money compound interest is the way to do it. Taking loans against retirement is better than a withdrawal but is quite hurtful in the long run. So if your goal is a healthy retirement roll all of your money to an investment with a large number of choices that can be an IRA or a 401k.

  3. Doug M says:

    One tidbit about borrowing from a 401(k) that I just had occasion to find out about the hard way… if you leave your current employer, the 401(k) loan becomes due in full immediately.

    I had no idea.

    I borrowed from my 401(k) to put money down on my condo a few years ago (bought at ~precisely~ the wrong time, but that’s another story). Was paying it back with payroll deductions, which was painless.

    I recently upgraded my job situation, and lo! Got a letter from Fidelity demanding the remaining balance or they would rat me out to the IRS. Yes, they said it more nicely than that, but that was the essence of the message.

    I called them, thinking that if I left the money with them, rolled it over to a Fidelity IRA, I could keep paying the loan back per the previous agreement… nope. No wiggle room whatsoever.

    Thank the Flying Spaghetti Monster that I had the money available in short term savings, or I would have really been shafted, tax-wise.

    Whether this sort of thing is required/law, or just bad Fidelity policy, I do not know. Either way, I’m rolling out of that place.

    The more you know.

    Doug

    • Travis says:

      The policy is based on the deal that your former employer set up with Fidelity. Some plans allow a auto draft from checking or send a monthly bill.

  4. Wim Taylor says:

    Personally, I am not that keen on all the constraints that come with having my money tied up in a 401K. I would prefer to roll the funds over into a self-directed IRA where I have more control over the investments. My investment of choice are mortgage positions. My investment is backed by an asset and a personal promissory note with a 70% or below loan to value ratio. The interest rate are typically fairly high as real estate investors are finding tight times when it comes to credit. Once the funds are self-directed (which granted does take time =( I can address the issue of volatilty by getting the funds out of global markets and into local markets based on cash flow and not speculation. In terms of borrowing against a 401K, I have really earmarked the funds for retirement and I try to keep a nice safety net available so I dont have to dip into these funds.

    Just the thoughts of one man though…

    Wim

  5. Steve says:

    First, you cannot take a loan on a 401 (k) as a separated employee!

    Second, as stated by Doug earlier, most employer plans have a repay loan feature on termination of employment.

    Third, very few plans send you a check if you are doing a rollover. You can have the funds transfered directly to your new IRA using either the new IRA company form, your old employer form, or automatically from their website. You will usually get a check if you don’t rollover your money if it is below a certain threshhold, such as $5,000. This is
    because the company doesn’t want to pay the admin on that small amount.

    For my clients I like to explain that it is like the airline business. The airlines use a hub and spoke system where a lot of there flights go through the hub then on to the destination. Your IRA should be your hub and your jobs should be the spokes. Every time you leave your job you should rollover your pension into your IRA. That way you have a centralized location for your retirement that you or your advisor can administer and manage in any way you like.

    I hope this clarifies some of the grey areas.

  6. Debbie says:

    Someone told me since I’m 55 and retired but haven’t rolled my 401k to my IRA that I can take distributions from it without the 10% penalty—is that true?
    Thanks,
    Debbie

  7. aua868s says:

    the process is cumbersome…bu i feel it is worth it to rollover.


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