Rolling Over Your 401(k)? This Common Mistake Could Cost You $130,000

Millions of American workers have made a costly mistake when they rolled over their 401(k) money into an individual retirement account, or IRA, according to new data.

Some 28% of savers who rolled over their retirement funds into an IRA in 2015 did not reinvest the money — leaving it to sit as cash in the new account — for at least seven years, investment firm Vanguard found in an analysis released Monday.

“Cash is the de facto default for individual retirement account contributions, despite being generally prohibited as a default investment option in 401(k) plans,” the researchers wrote. “Unless individuals voluntarily invest IRA assets, they tend to stay in cash indefinitely.”

Vanguard estimated that the mistake costs retirement savers a collective $172 billion per year in retirement wealth. Per person, that equates to more than $130,000 of forgone wealth by the time the person reaches retirement age.

It's a widespread problem: IRS data shows that about 5 million Americans roll over retirement savings into IRAs each year. Of them, Vanguard study suggests that at least 1.4 million aren’t reinvesting their rollover contributions.

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Rollover blunders worse for younger investors

Known as a 401(k) rollover, many job-switchers opt to move their retirement savings from their old company’s 401(k) plan into an IRA upon departure. While this is generally not required — workers can have as many 401(k)s as they want — it's a popular way to consolidate retirement accounts and have more control over them.

According to the Tax Policy Center, a nonpartisan think tank, nearly 65 million Americans own IRAs. While far more Americans hold employer-sponsored plans like 401(k)s or 403(b)s, the collective balances of IRAs now dwarf retirement plans through the workplace.

Per Vanguard, retirement savers hold more than $13 trillion in IRAs, about $3 trillion more than employer-sponsored plans. A large reason why is because of rollovers: Each year, the vast amount of contributions into IRAs are rollover funds (88% in 2020) as opposed to direct contributions.

But sometimes people don't take the final step to maximize their money when moving those 401(k) funds. Vanguard’s study suggests a significant portion of the $13 trillion in IRAs is allocated as cash, and thus not earning crucial stock market returns.

What the study also found was that some people are more likely than others to accidentally leave their rollover contribution languishing in their IRA. Age, gender and wealth were all major factors.

For instance, twentysomething investors were far more likely than their elders to have their IRA balances left as cash. In fact, the majority of them were found to have not invested their balances after seven years. The same was the case for account holders with smaller balances of $5,000 or less. By contrast, older and wealthier investors usually reallocated the cash within a few months of the rollover.

Regardless of age or wealth, Vanguard found that women were “significantly more likely” than men to keep their rollover balances in cash.

Though the financial firm's analysis was centered around rollovers, overlooking this crucial step is a common IRA issue. In recent years, many young investors have taken to social media to share their investment blunders in a bid to keep others from making the same financial folly.

“Wanna hear something that will make you feel better about yourself?” TikToker Kayla Caneat asked in a 2022 video that has racked up more than 2 million views. She explains that she contributed monthly into a Roth IRA for over two years before she realized the money wasn’t invested.

“I never bought a single stock,” she said, staring deadpan into the camera. “I thought it was automatic.”

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