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401k rollover from previous employer
Posted on 5/17/20 at 10:45 am
Posted on 5/17/20 at 10:45 am
I might be overcomplicating this, but I'm confused on the logic of a 401k rollover...
Say you have $100k in your employer 401k account that you've contributed over 'x' years, then you take a new job.
Everything I've read says you can either,
- Keep at previous employers plan
- Rollover to new employers plan
- Rollover to new IRA
- Cash out
Yet everything I read when you do any type of rollover...you are essentially "selling" your investments in your previous employer plan and then that money goes into your new employer plan / IRA as a lump sum (cash) for you to invest.
So in my example above, you have $100k worth of holdings in mutual funds, stocks, etc.
Now when you roll it over you have $100k in cash in your new plan...and would start buying whatever fund, stock, bond, ETF that you want.
So let's say the market gets back up to 29-30k, etc. when you roll it over...aren't you now "buying at the top", i.e. buying a whole bunch of securities at higher prices, meaning you are buying less of them, etc.
Aren't you losing the power of compounding in this scenario...and now are buying less with your money? I get that when you effectively "sell" when you roll it over you are realizing the gains you've made. But for whatever reason, I still can't reconcile if that makes sense or not.
I realize the answer is probably dead simple and I might be the biggest goofball for even asking, but I'm struggling with this lol.
Say you have $100k in your employer 401k account that you've contributed over 'x' years, then you take a new job.
Everything I've read says you can either,
- Keep at previous employers plan
- Rollover to new employers plan
- Rollover to new IRA
- Cash out
Yet everything I read when you do any type of rollover...you are essentially "selling" your investments in your previous employer plan and then that money goes into your new employer plan / IRA as a lump sum (cash) for you to invest.
So in my example above, you have $100k worth of holdings in mutual funds, stocks, etc.
Now when you roll it over you have $100k in cash in your new plan...and would start buying whatever fund, stock, bond, ETF that you want.
So let's say the market gets back up to 29-30k, etc. when you roll it over...aren't you now "buying at the top", i.e. buying a whole bunch of securities at higher prices, meaning you are buying less of them, etc.
Aren't you losing the power of compounding in this scenario...and now are buying less with your money? I get that when you effectively "sell" when you roll it over you are realizing the gains you've made. But for whatever reason, I still can't reconcile if that makes sense or not.
I realize the answer is probably dead simple and I might be the biggest goofball for even asking, but I'm struggling with this lol.
4
Posted on 5/17/20 at 11:00 am to LSU_TC
No
The only reason for the “sale” would be that the offerings aren’t the same, otherwise you’d roll in kind.
If this transaction happens quickly, you are rebuying at roughly the same market levels
The only reason for the “sale” would be that the offerings aren’t the same, otherwise you’d roll in kind.
If this transaction happens quickly, you are rebuying at roughly the same market levels
Posted on 5/17/20 at 11:07 am to LSU_TC
The correct answer is almost always to rollover the IRA to a third party company like Fidelity, Vanguard, etc. due to the tremendous amount of options available compared to a standard 401k plan. The whole process only takes a few days and any change in the market should be negligible in that time frame. You will essentially be buying back what you just “sold” in your 401k plan, but generally with better mutual fund options at lower expense ratios.
Posted on 5/17/20 at 11:35 am to LSU_TC
When we did this, it went from employer fidelity to vanguard IRA.
Essentially process was:
Inform fidelity of rollover to vanguard
Open vanguard account for rollover
Tell fidelity account info
Fidelity cuts check payable to vanguard and sends to you
When you get that check, you forward it to vanguard
Vanguard gets and deposits
You can use the funded money on that IRA to buy whatever in the new vanguard ira
Essentially process was:
Inform fidelity of rollover to vanguard
Open vanguard account for rollover
Tell fidelity account info
Fidelity cuts check payable to vanguard and sends to you
When you get that check, you forward it to vanguard
Vanguard gets and deposits
You can use the funded money on that IRA to buy whatever in the new vanguard ira
Posted on 5/17/20 at 11:46 am to PillPusher
The issue with rolling into a traditional IRA is that you essentially lose the ability to do backdoor roth IRA conversions due to the pro-rata rule.
As long as the new company's 401K doesn't have ridiculously high fees and at least some options that make sense (S&P500 fund or total stock market fund), I would roll into the new company's plan. I have rolled old 401Ks into my new employer's plan in the past.
As long as the new company's 401K doesn't have ridiculously high fees and at least some options that make sense (S&P500 fund or total stock market fund), I would roll into the new company's plan. I have rolled old 401Ks into my new employer's plan in the past.
This post was edited on 5/17/20 at 11:49 am
Posted on 5/17/20 at 1:27 pm to bod312
No expert here, but I was told if you leave it as is in former employers plan you lose the ability to start drawing from it penalty free at the age of 55. If you roll it to new employer and then get fired or quit your job the year you turn 55 you can start drawing it without penalty
Posted on 5/17/20 at 11:16 pm to LSU_TC
As to the question of what to do with it, IRA is most likely best option as that opens the door for many more investing options.
Now for your question about if you're selling at a loss and buying at the top. Short answer is No. Just make sure you get in a similar fund pretty quickly.
Now for your question about if you're selling at a loss and buying at the top. Short answer is No. Just make sure you get in a similar fund pretty quickly.
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