Michael on May 23rd, 2008
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It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question.

Say I invested 10% of 50k for 4 years (20k) and had 8% returns, but now things are tanking. How does a person decide whether to bite the bullet or not? If I roll it from account A to account B, same type of asset class, I’ll be buying far fewer shares, I think, and then my brain starts to melt. I don’t know if this even made any sense, but if it did, I’m curious about your thoughts.

Beth H.


When you roll over your 401(k) into an IRA, you can invest in just about anything you want to within the IRA. This often includes the exact same investment as you formerly held in your 401(k).

More detailed explanation:

By saving 10% of your gross $50K salary, you saved $20,000 after four years. You earned an 8% return over that time. Fair enough. Now “things are tanking” and you would like to know whether “to bite the bullet.”

You are actually mistakenly combining two decisions into one.

  1. Your first decision is whether to roll over your 401(k) account into an IRA.
  2. Your second decision is whether to “bite the bullet” and sell your existing investment.

These two decisions can and should be made separately.

A decision to roll over your account is not an investment decision–it’s a convenience decision. This is because you can invest in just about anything within an IRA. (Note, in some cases, you may have special classes of low-expense versions of funds not offered to the general public (you) in an IRA. For most people, this is not a legitimate concern, however.)

I typically advocate for rolling over your 401(k) balances as you leave employers because it keeps life simpler. Rather than having different accounts to keep track of (and effectively manage), you can just have your current 401(k) plan plus one IRA. To make it even simpler, you can roll over your previous 401(k) to your current employer’s 401(k) plan, but then you forgo the opportunity to have unlimited investment options. Instead, you’ll only have the options presented to you in your current employer’s plan. Furthermore, your current job might not even have a 401(k) plan.

As far as the investment decision goes, I don’t have nearly enough information from you to tell you what to do. But even if I did, I wouldn’t actually render an opinion. But I think I can help anyway.

Assuming you have a long time until retirement, you should be willing to ride out the ups and downs of the stock market. These lower points provide you an opportunity to buy more shares at a cheaper price – a good thing to be sure. Experts will tell you that many successful investors buy when others sell and sell when others buy. Of course, that’s market timing – so I don’t advocate doing exactly that. The best approach is to not think about your investments’ return on a daily basis. You can forget about it for extended periods–once you know you’re in quality investments.

Ultimately, you need to do some research. Check out the quality of your investments by looking at their long-term investment performance against similar funds and similar indices.

Sound good?

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2 Comments to “To roll over or not to roll over: Friday Q & A”

  1. Jeremy says:

    Great advice. I rolled over a 401(k) from my old employer into a new IRA account several years ago. I already had a separate Roth IRA but was told you can only roll 401(k) funds into a traditional IRA, not a Roth. So now I have one of each.

    Also, I recently made a contribution to my Roth IRA. The financial advisor at my bank suggested that although I was investing a lump sum, I might want to use a portion of that total investment to purchase shares of my chosen fund every month. That way, I get the benefit of dollar cost averaging and don’t have to worry about market timing.

  2. Michael says:

    At the time you rolled over your 401(k), you could only do so to a traditional IRA. Since the beginning of the year, however, you can convert a 401(k) account directly into a Roth IRA. Of course, you must pay taxes on the conversion, but it is no longer necessary to take the two distinct (first rollover to traditional, then convert to Roth) steps.

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