When it comes to managing your retirement savings, there’s one mistake that could cost you dearly—rolling over your 401(k) into an IRA and then forgetting to invest those funds. It’s more common than you might think, and the consequences can be financially devastating.
The Shocking Truth
A recent chart from The Wall Street Journal highlights a startling trend: a significant number of people who roll over their 401(k) accounts into IRAs neglect to invest the funds afterward.
Why This Happens
Many assume that their job is done once they complete the rollover. They might be unfamiliar with the process or simply forget the final, crucial step of actually investing the money, which has been converted to cash. Unfortunately, this oversight means their savings are sitting in a low-yield account, missing out on potential market gains.
The Cost of Inaction
Consider this scenario: you roll over your 401(k) today, and a decade later, you check your balance, only to realize that it hasn’t grown as you expected. The market might have delivered strong returns during that period, but your funds didn’t participate because they were never invested. This kind of mistake could set your retirement back significantly.
How to Avoid This Costly Mistake
If you have an old 401(k) floating around, completing the rollover process is essential. Here’s how:
- Find a Low-Cost IRA Broker
Look for a reputable, low-cost broker to house your IRA. Fidelity, Vanguard, and Schwab are excellent choices, offering a range of low-cost index funds to help you grow your savings over time. - Roll Over in a Timely Manner
Don’t delay your rollover. The longer you wait, the more time your money is spent out of the market. If the process seems daunting, consider using a service like Capitalize, which simplifies rollovers for free. - Understand the Tax Consequences
It’s crucial to understand that rolling over your 401(k) isn’t the same as withdrawing funds. If you don’t execute the rollover correctly and report it properly to the IRS, you could be hit with taxes and penalties. Always follow the proper procedures to avoid these unnecessary costs. Note: the presence of a traditional IRA may keep you from conducting a backdoor IRA! - Invest Your Funds Immediately
The most important step is to ensure your rolled-over money is invested as soon as it lands in the new IRA. It would be a mistake to consider this a candidate for Dollar Cost Averaging. If you were comfortable with the asset allocation yesterday (in equities), you should be OK today with that same allocation (or whatever improved allocation you want). Whether you choose a diversified portfolio of index funds or another strategy, getting your money into the market is critical to your long-term financial success.
The Bottom Line
A 401(k) rollover is an important step in managing your retirement savings, but it’s not the end of the process. Make sure you complete all the steps, especially the final one—investing your funds. By doing so, you’ll ensure your money continues to work for you, helping you build the retirement of your dreams.
