Transferring 401K to Traditional IRA in this volatile market

christineMarch 11, 2009

We have several small 401Ks from previous employers and one bigger one from my DH's last employer. We want to consolidate these for ease of access and also to make it easier to analyze our asset balance. I also have an employer based 401K at the company we are choosing to roll everything over to that I am planning to convert to a traditional IRA (previous employer so I can do this). DH has a traditional IRA and we both have a Roth at the company we are putting all the money in. The plan is to end up with one Roth and one traditional IRA each, plus our current employers' plans which are not at the same company we're moving the money to.

It takes awhile to sell from one company, get the assets sold and a check written to the new company (the check will get written right to the new company on our behalf and there will be no tax implications for us as far as I know). This process will take approximately 2 weeks per account if things go smoothly. With the market being so volatile, missing 2 weeks is concerning to me. The smaller accounts don't bother me so much, but the bigger one makes me nervous due to the amount of money and its current allocation is really not what we need (DH chose to put a large %age in a small cap intl fund before we got educated on these things). I think to minimize any effect, I would like to move them slowly, one at a time. I wonder if I could break the bigger account up into 2-3 different transactions to minimize any market jumps that might happen during the time we are doing this. I guess I am working under the assumption that if the US market makes a significant move, it will affect the foreign markets in short order and everything will go up or down at basically the same time. Is that a fair assumption given the world economy right now? Should I rebalance the larger account now and leave it there until the market is less volatile?

Does this sound like an ok strategy given the current market situation? That way we don't have too much out of the market at any given time. There is also the issue of choosing funds for them to go into - I guess they often recommend parking the money in a money market and choosing later, but again, the volatility makes me want to get back into funds ASAP. We have a good idea what we want our allocation to be so it should be fairly easy to get it close to what we want as soon as possible once the money is in there, if not at the time of actual transfer get it into our desired funds. I do not want to try to time the market and never have - if it was ever possible before, I imagine it is infinitely more difficult these days. I just want to be in the market for as many days as possible, for some reason that feels like the smartest thing to do right now.

One other thing I am trying to figure out is whether to allocate the same asset balance in each of our accounts according to our goals and risk tolerance, or let's say do the large caps and bonds in one of our accounts and the mid, small and international in another account or however it reasonably breaks down for the asset balance we desire for the other account. Any advice on this?

Any advice on any of this? The advice is greatly appreciated! Thanks for reading and taking the time.

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Why are you selling to move? My understanding is that you can move both assets and money?

    Bookmark   March 12, 2009 at 12:21PM
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>>My understanding is that you can move both assets and money?Because a different co. will be handling the assets, they must be converted to cash in order to move. This is standard procedure between fund companies.

In this market environment your guess is as good as anyone else's, including any "experts". That said, I think market volatility will continue unabated for several months. Positive factors are starting to show but not enough to worry about doing a transfer right now.

I would not drag out the process. Get it done as soon as possible, reallocate the funds the way you want for proper diversification, and make sure your beneficiary designations are up to date on the new accounts. Good luck and congratulations for consolidating the accounts, it will be much easier on you to track results going forward.

    Bookmark   March 12, 2009 at 2:36PM
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Still do not understand or believe - Here is what Interactive Brokers has to say - I use them as one of my brokers

"Direct Rollover
(IRA account only) You may transfer assets from an existing 401K or other retirement plan into a Direct Rollover Account only. When you choose Deposit Instructions and then Direct Rollover from Account Management, you will be prompted to complete the information about your existing retirement plan which you must print, sign and send back to IB. IB will sign this form and forward it to your existing retirement plan to initiate the Direct Rollover. "

So please check carefully if this really is necessary.

Here is a link that might be useful: Interactive Brokers 401k to IRA

    Bookmark   March 12, 2009 at 6:24PM
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I think you have a misunderstanding of what 'Direct Rollover' means. It means it goes from company to company on your behalf to avoid any tax implications of getting a check cut directly to yourself within qualified plans. It does not mean the assets do not get sold. In the case of your company, you would fill out the form and print it, and they get a check cut from your old company once the old company sells the assets, which you then have to direct the new company how to invest.

Everyone else - thanks for the advice so far - I would welcome more if anyone is up for it.

Here is a link that might be useful: Definition of Direct Rollover

    Bookmark   March 12, 2009 at 10:22PM
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Remember you can own more than 40 different types of assets in an IRA account. You're not limited to holding just traditional securities.

Most major brokerage firms managing IRAs offer a selection of mutual funds for you to invest in but restrict your holdings to traditional securities. They are usually not equipped to handle real estate, private equities or others asset classes that the IRS permits.

For instance, you can own most any type of real estate including vacation houses, boat slips, and/or commercial. You cannot, however, own any real estate that you care currently benefiting from.

For example, you can own a beach house but you or your family cannot use the property during the time it's held within your IRA. But, you can rent it for a profit.

Another can purchase a building lot and flip it 30 days later for a profit...all legal within your IRA.

You can even invest in cattle within your IRA.

Banks will also lend on IRA purchases. So, it's possible to use leverage. You can expect to pay a slightly higher interest rate than if you were borrowing personally but, in some cases such as real estate, the ability to use leverage in your IRA more than justifies the higher rate.

Most people are only aware of the traditional mutual fund type of investments. But, if those are doing poorly...well, you've got other choices.

To invest in other types of assets, you need to open whats called a "self-directed IRA" with a custodian that allows you to invest in the full range of asset types allowed by the IRS. With a self-directed IRA, you can invest in real estate and privately held businesses, make secured loans (such as a mortgage), make unsecured loans, and also invest in traditional assets such as stocks and mutual funds. With real estate bought by a self-directed IRA, any income and capital gains grow tax-deferred in the case of traditional IRA or tax-free in the case of a Roth.

Fees for a "self directed" IRA with a full-service custodian are higher than those charged by custodians offering only traditional securities.

There are only 3 assets classes the IRS forbids you to hold within an IRA: Collectibles, Life Insurance, & S Corporations.

As usual with the IRS, there are lots of little quirky rules that failure to follow could result in significant penalties so this type of IRA investing is not recommended for people skittish about actively participating in the decision making process.

Anyway, you would not have to sell an office building or a herd of cattle just because you changed custodians. The "system" is geared towards funneling the "masses" into traditional securities. OTOH, that's the safest investment for the vast majority of people.


    Bookmark   March 13, 2009 at 6:30AM
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That is all very interesting information! I will look into some of that for the future, but right now I am just not in a place to process that level of detail to understand all the laws. The overall concept is certainly appealing. It did raise a question for me, does one invest in real estate or other - for the sake of argument let's call them 'non-traditional IRA items' when the cap is $5K/year? You certainly can't buy real estate for that price in most markets. So I guess the option is to sell your 'traditional' assets and use that to buy the 'non-traditional' assets? Just trying to figure it then you can't have a mortgage on a property like that either? How do the expenses and taxes get paid in the event it isn't making a profit? Out of the IRA or out of your pocket? It seems like a complex situation.

I had heard of a self directed IRA before, I just didn't know exactly what that meant. It is a very interesting proposition for the future...thanks for the information!

    Bookmark   March 13, 2009 at 12:02PM
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We had a significant 401(k) built up when my DH changed positions. We transferred that fund into a "self-directed IRA" with a custodian (the funds never passed through DH). The 401(k) only allowed us to invest in traditional mutual funds. So, we did have to liquidate those funds to have cash in the new IRA to consider alternative investments.

Yes, you pay real estate taxes from the IRA. Your custodian handles payment (one of the reasons why fees are higher). Or, if you've used leverage the mortgage servicer will withhold taxes & insurance same as on a personal mortgage.

Also, on real estate, you can't do any sweat equity because that would be a current benefit.

It is more complicated & there are, as I noted above, many little IRS rules...but, I'm a firm believer that nobody cares more than you about your money. Trying to build wealth with only mutual funds is like trying to play basketball with one hand tied behind your back. IMO, mutual funds are designed to build wealth for the fund manager...not us. Sure, it's nice if our contributions grow over time but during times like these it sure is nice to have REAL diversification.

You can invest in such things as start-up businesses, even your own business as long as you are not a majority owner & don't pay yourself a salary (unless that salary is out of your control), & you can even hold bullion in an IRA (it's held in an IRS approved despository).

Anyway, just a few things to consider.


    Bookmark   March 13, 2009 at 2:54PM
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