At Extreme Investor Network, we are committed to providing unique and valuable information to help you make informed decisions when it comes to your finances. Today, we are diving into a common mistake that many investors make when rolling over their money from a 401(k) plan to an individual retirement account (IRA).
According to recent IRS data, approximately 5.7 million people transferred a total of $618 billion to IRAs in 2020. However, what many investors don’t realize is that a significant portion of them leave their funds sitting in cash within their IRAs instead of investing it. This decision can cause their savings to “languish,” as noted in a recent Vanguard analysis.
In fact, about two-thirds of rollover investors unintentionally hold cash in their IRAs. According to Vanguard, 68% of investors don’t realize how their assets are invested, compared to 35% who prefer to keep their investments in cash-like vehicles.
The process of moving funds from a 401(k) to an IRA can contribute to this cash-heavy strategy. When investors liquidate their holdings in a workplace retirement plan, such as an S&P 500 index fund, and transfer the funds to an IRA, the money typically ends up in cash. The account owner must actively decide to invest the funds in other assets.
Philip Chao, a certified financial planner and founder of Experiential Wealth, emphasizes this point, stating that “it always turns into cash” and that the funds often remain stagnant until a decision is made to invest them elsewhere.
While holding cash can be a reasonable strategy for short-term needs or emergency funds, financial advisors caution against maintaining large amounts of cash in retirement accounts. Over the long term, the interest earned on cash holdings may not keep pace with inflation, ultimately hindering the growth of retirement savings.
Chao advises against keeping significant amounts of money in cash for long periods, highlighting that history has shown it to be a mistake. Instead, he suggests using cash as a temporary placeholder while making investment decisions or transitions, but stresses the importance of not letting it sit idly for years.
It is essential for investors to be aware of potential changes in interest rates and to regularly reevaluate their investment strategies. With the anticipated rate cuts by the U.S. Federal Reserve, investors should consider moving excess cash into more productive investment vehicles.
At Extreme Investor Network, we believe in empowering investors with the knowledge and tools needed to make sound financial decisions. Remember, the key to maximizing your retirement savings is to ensure that your money is working for you and not languishing in cash. So, whether you’re considering a rollover from your 401(k) to an IRA or evaluating your investment options, be sure to stay informed and proactive in managing your financial future.