I changed jobs this year and as a consequence, rolled over my employee 401(k) to a personal rollover IRA. I just completed the rollover earlier this month, and right now the money is just sitting in a money market. I know I need to choose investments soon, but with the size of the investments I don't want to make any rash decisions.

We've taken a vacation for the holidays and I'd like to not think about it until I get back.

What are the tax consequences of investing before the end of the year or after? Better, worse, or neither?

3 Answers 3


Tax consequences

The tax consequence is that if you wait until January of 2011 to invest, you won't have the option to sell as a long-term capital gain in 2011. However, this is not a huge point in practice:

  • If the investment is at a loss, you would rather it be short-term (if you care at all). You can sell in late 2011 as a short-term loss in either case.
  • If the investment is at a gain, you would rather it be long-term. However, you can just hold onto it into 2012, since you normally would rather defer gains anyway.
    • The exception would be if your marginal tax rate would be higher in 2012 than 2011, which could occur because of your income going up, or tax code changes. This might cause you to prefer to sell in 2011, if you were planning to sell soon anyway.


If your income this year was very low, but will go up in 2011, you might want to convert some or all of it into a roth ira this year. This would let you pay the tax on it at your low tax rate for this year, rather than at the likely higher rate when you retire.

Investment return consequences

An investment consequence is the fact that your money is sitting there, earning a lower expected rate of return than it could be. Not knowing your situation, I can't say how aggressive your holdings will be. Taking a fairly aggressive portfolio, 9% expected yearly return, and not investing for a month, you lose about .75% on average. Not huge, but something to consider. Remember that any decision you make here isn't permanent. If your previous allocation in the 401(k) was 100% in stock funds, you could put it in something like VTI, Vanguard's total US stock market ETF.

  • Since the money was previously invested, dollar-cost averaging doesn't apply here.
  • I didn't think the tax consequences would apply because they were in retirement accounts (401K + Rollover IRA). I don't think there is an advantage to when you sell gains or losses as long as the proceeds stay in the retirement account.
    – Alex B
    Dec 22, 2010 at 15:20

If you don't pull the money out of an IRA or 401(k) until you hit retirement age, there are no tax consequences at all. No matter how you invest or ignore it, it won't affect your return. Same for a Roth IRA, unless you move money out of the account before age 59 ½ it's essentially invisible to the IRS.

(Because some of a Roth has already had taxes paid, the rules are more complicated if you do pull out the money, whereas the others are just a straight tax penalty with few exceptions.)


With a tax-sheltered account like an IRA, timing is irrelevant with respect to taxes. So enjoy your vacation.

When you get back, don't invest in one lump sum -- break up your purchases over a period of weeks if possible. If you are investing in ETFs for your index funds, many brokers have no transaction fee ETF options now.

  • 1
    Thanks for your answer. Can you elaborate on why it's advisable to break the purchases up?
    – Nicole
    Dec 22, 2010 at 6:42
  • It insulates you from daily price swings. I always feel like a chump when I happen to make a decision to buy something on a day when the price happens to pop 5%, and immediately go down the next day. Dec 22, 2010 at 13:17
  • It also means that you may miss (or partially miss) any upswings in the market. There have been studies that, historically, it is better more often than it is worse to just invest the entire lump sum at once. This make sense when you think about the fact that the general trend of the market is up. So, on average, waiting should lead to a higher purchase price.
    – KeithB
    Dec 27, 2010 at 21:53

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