Should You Roll Over Your 401(k) During a Recession?

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A recession probably shouldn’t influence whether you roll over your 401(k). Read on to find out why an IRA could be a good option no matter what the economy is doing. 

When an economic downturn comes around, it’s easy for investors to get jittery. People naturally assess a new situation — like a recession — and try to figure out how they should respond to it.

Investors understandably take a look at their 401(k) and wonder if rolling it over to an individual retirement account (IRA) is the better option. Considering that 68% of Americans think a recession is around the corner — and 80% of that group believe it will be as bad as the 2008 downturn — some workers may likely be considering such a move.

So, let’s take a quick look at the benefits of rolling over your employer-sponsored 401(k) to an IRA — and why the economy shouldn’t be a driving force in your decision.

A recession shouldn’t dictate your 401(k) rollover plans

Some people consider rolling over their 401(k) to an IRA because they want to feel like they’re taking some control over their investments when the economy isn’t doing well. Gaining control over your investments can be beneficial, as long as you’re not panicking.

One of the key benefits of moving your 401(k) into an IRA is that you will have more investment options. For example, you can buy individual stocks or choose from a long list of index funds in an IRA — compared to the typically pre-selected funds you can choose from in most 401(k)s.

If there’s a recession and stock prices tumble, you may be able to allocate your money in a more diversified way through your IRA compared to an employer-sponsored 401(k).

I did this — admittedly, entirely by accident and not trying to time the market — when the stock market dipped at the beginning of the pandemic. I already planned to roll over my old 401(k) to an IRA and happened to do so when the market fell, and then put the money into an index fund and some stocks. While my investments rebounded when the broader market did, they probably would have done so in the 401(k) target date fund I was previously invested in as well.

If you want more control over your investments, it shouldn’t matter whether there’s a recession. Focus instead on what investments you want to own, and try to avoid panic buying or selling, so you can stay focused on your long-term goals.

Here are a few tips if you’re thinking of rolling over your 401(k)

If you’re planning to roll over your 401(k), there are a few things you should keep in mind before you do, and some reasons why it could be a good idea.

1. Consider your motivation

Vanguard says on its website that you should consider your motivation when thinking about an IRA rollover. The investment firm noted that some people nearing retirement may move their money into an IRA to gain more clarity about their investments. “Putting all your retirement savings in one place makes it easier to manage your accounts and monitor your progress,” Vanguard says on its website.

2. You’ll have more investing options

I mentioned this earlier, but it’s worth repeating: You’ll have a lot more investment options with an IRA. Most 401(k)s have limited investment options, which may include target-date funds. While that’s not necessarily a bad way to invest, an IRA will give you the option of buying individual stocks, bonds, certificate of deposits, mutual funds, and exchange-traded funds (ETFs).

3. Keep your eyes on the horizon

No matter what’s going on with the economy or the stock market, it’s always best to keep a long-term perspective on your investments. If that’s your motivation for rolling over your IRA, then you’ll be more likely to choose investments that will help you grow your money over time, instead of having an emotional reaction to the stock market’s performance or a recession.

In short, if you’re considering rolling over your 401(k) to an IRA during a recession, ensure you’re doing it for the right reasons. There are some clear benefits to having your money in an IRA account — but those benefits exist whether there’s a recession or not.

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