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Waiting for a 401(k) check to arrive? A two-month wait may be costing you more than you realize.
If there is a delay of two months when rolling over a 401(k) worth $100,000 into an individual retirement account (IRA) and you miss out on an upturn in a volatile market, that could mean losing out on more than $76,000 worth of returns over 30 years, according to analysis by PensionBee (assuming a 7% annualized return).
“In most cases, the delay is going to be much less than 60 days,” says Chris Chen, a certified financial planner at Insight Financial Strategists. “You are also missing the downturn that may happen. The reality is that predicting upturns and downturns is an art at best. There are times when you just need to bite the bullet.”
However, PensionBee also found that even a smaller delay, of just two weeks, during a period of high volatility could result in investors missing out on substantial gains in retirement.
If a rollover check of $10,000 was delayed just two weeks during a period of high volatility, an investor could lose out on more than $3,700 worth of returns over 30 years, according to PensionBee.
Key Takeaways
- Protect your investments by moving fast when rolling over a 401(k). Deposit the check from your 401(k) as quickly as possible into a retirement account.
- A 401(k) plan from a new employer or an individual retirement account is a good rollover choice. Look carefully at the investment costs and investment choices of each before rolling over 401(k) money.
- If there is an option for moving 401(k) money directly to a new account, consider doing so, as it’s typically the fastest option.
Managing 401(k) Money
When rolling over a 401(k), you will typically be sent a paper check that you can deposit in an individual retirement account or in a 401(k) plan for a new employer. This process can take two weeks to two months.
“In general, 401(k) custodians will send you a check to deposit with your new 401(k) or IRA. You cannot do much to accelerate that,” Chen says.
But when the check arrives, you can be quick about depositing it.
“You have 60 days from the check issuance to deposit it in a retirement account if you want to avoid creating a taxable event,” Chen says. “It is simple: Deposit it as promptly as you can.”
And if you are given the option of your 401(k) money being moved directly to a new account, agree to the transfer.
“Some custodians will offer to transfer the money directly to your new account. If they offer that solution, take it because it will minimize the time that your money remains uninvested,” Chen says.
Where to Move Your 401(k) Money
New 401(k) Plan
One strategy for rolling over your old 401(k) is investing in the 401(k) plan of a new employer. Before you do, study the details of a new 401(k) plan carefully.
“Rolling an old 401(k) to a new 401(k) is often recommended,” Chen says. “Many think that 401(k) plans are less expensive than IRAs. That can be true for larger and well-managed 401(k)s. Unfortunately, that’s not most of them. There are 401(k)s with excellent investment choices. Many have subpar investments that cost too much.”
Individual Retirement Account
An IRA may be a cheaper choice, and many come with good investment options.
“Rolling over to an IRA can make good sense. First, many IRAs are as inexpensive as the best 401(k). In addition, they often have a much greater breadth of investment possibilities. As an investor, you will be in greater control of your financial destiny,” Chen says.
Do Nothing
It may cost you to keep your money in an old 401(k).
“Employers often pick up the administrative cost of the 401(k) for their employees, but often do not for their former employees. As a result, a plan that appeared inexpensive can become less so overnight,” Chen says.
Cash Out
Avoid withdrawing all of the money from your old 401(k).
“The one option you should not take is to cash out your 401(k). First, it is expensive. If you are less than 59½ years of age, you will be paying income taxes plus a 10% penalty. In most cases, leaving it to grow in a retirement account makes better sense,” Chen says.
The Bottom Line
If rolling over a 401(k) takes two months, you could miss out on any upturns in the market, potentially costing you a lot of money over the long term. So be ready when a 401(k) check arrives in the mail, and deposit it into a retirement account as soon as possible.
You can roll over an old 401(k) into the 401(k) plan of a new employer or deposit it into an IRA. Carefully compare investment costs and investment options when deciding between a new 401(k) plan and an IRA. Choose the best option and deposit your 401(k) as swiftly as possible.
