Transferring 401K to Traditional IRA in this volatile market

15 years ago

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.

Sort by:Oldest

Comments (7)

punamytsike
15 years ago
last modified: 9 years ago
Why are you selling to move? My understanding is that you can move both assets and money?
jakkom
15 years ago
last modified: 9 years ago
>>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.
Related Discussions
Question about 529 v 401K
Q
Comments (6)
Hi Christine, I know Dave is a well respected advisor on these boards, but I have to say I have always been told to steer clear of anything other than Term Life. Thanks... uhh, I think? Hopefully I'm not losing any respect from the lack of financial planning experience from whoever 'always' told you to steer clear of anything other than Term Life. Many people here have also "always" been told to pay off their mortgage as fast as possible, "period," regardless of the risks & harm it can create too. What many have "always" heard is not always so valid. Dave perhaps you could clarify why Universal Life is a good option in general and also specifically in this case? I have been on this site off and on for a very long time, however, I have not read that many posts on this particilar board to know your general philosophy on this. Sure. FIRST off, it is most likely the case that "everyone" who "always" advised you to avoid anything but "term" was specifically talking about buying life insurance for the purpose of the insurance DEATH benefits... not the financial planning features available within certain types of it. For the best death benefits "bang for the buck"... Term life premiums are state regulated, so for the most part you pay for the benefit coverage you get, and nothing more, regardless of the carrier (which is GOOD if what you want is a payoff at death.) Differences in term life premiums are generally quite small, and when one carrier appears to be "cheaper" per $1,000 of benefit than another (i.e. if you Google for 'cheapest term insurance' etc.) its generally because that carrier has less capital reserves to protect its policy-holders, thus less costs... and is thus more at risk of being illiquid... *OR* it fights harder NOT to pay all of the benefits expected when its policies mature, and thereby it has less costs of fulfillment. There are OTHER very important financial benefits to life insurance contracts, however, OTHER than the ultimate payoff of a death benefit at policy maturity. Congress has written legal "tax-shelter" features into the IRS code such that cash values sheltered within properly structured life insurance contracts grow and are harvestable UN-TAXED. Universal Life *IS* a term life policy (underwritten through age 100,) that offers a SEPERATE (un-comingled) cash accumulation account with the unique tax sheltered benefits only available inside cash-value life contracts. (NOTE that this is distictively different from old-fashioned "whole life" contracts that inseperably comingle insurance costs with their cash-values.) For FINANCIAL PLANNING purposes we want the maximum shelter benefits with the LEAST actual insurance coverage we can get away with (since, for this particular purpose, we don't care about death benefits.) The cash account within a Universal policy is allowed to grow tax free (no annual capital gains nor income taxes,) and is allowed to be accessed for spending tax free (via zero-interest policy "loans" which have no repayment requirement until the policy "matures"... aka when the insured dies.) Our OP is concerned about college tuition fund planning. The general strategy with college funding is to take advantage of *ALL* external funding resources (public assistance, grants, loans, and public/private scholarships) *BEFORE* dipping into the family-accumulated funds. THe catch-22 is that *MANY* external funding sources are "means tested." This means that they look at the student's fmaily's financial profile 1st... and if the family has funds in reserves, the external sources DEDUCT those from the support calculations (in essence saying "you guys drain your OWN accounts before we'll offer you any support!") Of course, this is completely contrary to the idea of rewarding those who are responsible... which is the whole point of using Universal Life insurance contracts to accumulate college tuition (and subsequently retirement funding for the parents.) Universal Life policies can also be "owned" by someone other than the person that the policy is insuring (the "insured.") The owner can be grandparents, uncles/aunts, god-parents, seperate trusts, or simply trusted friends. Because the ownership of this accumulation asset can be legally seperated from the student's family balance sheet, the student's family does NOT have to drain all of their own reserves before taking advantage of external educational support resources. PERSONALLY (and professionally,) in regards to actual death benefits... I would probably almost "always" harmonize with whoever else was "always" telling you to avoid anything other than term life. For death benefits (replacement of a parent's income for family support, most commonly,) term is generally the best way to go. For FINANCIAL PLANNING, however... age-100 term life coupled with cash values (in the form of Universal Life,) can be a very sharp strategy from both the tax-shelter perspective, and the avoidance of means-testing punishment of the more financially responsbile. Cheers, Dave Donhoff Leverage Planner
...See More
Current Market downturn
Q
Comments (44)
jkom51-"Actually, Joyful, if Carol doesn't have the strong stomach needed to be an active investor, she is BETTER OFF not fooling around with her portfolio, which she says is diversified, than to have the knee-jerk reactions many amateur investors do (which is run for the hills, find a hole and pull it in after them, when times are a little tough, like now). An interesting article in this month's Forbes mentioned that equity fund managers were feeling frustrated because they felt there were some good buys in stocks, but investors yanking their money out to flee into "safer" investments meant they didn't have the liquidity to buy." I doubt that the folks who have bailed out of Bear Stearns, Citi, Wachovia, etc, etc, are kicking themselves for 'running to the hills' and not trusting the system to keep their money safe until they are ready to retire. Even Warren Buffet is keeping a lot of cash handy and he is anything but an 'amateur investor'. As for all those poor 'frustrated equity fund managers', why wouldn't they be frustrated? How do they make money when people aren't putting their money in the market? Carol has reason to be concerned about her pension. The rules have changed and even the 'safest' investments are being questioned. A record amount of money has been lost in under the table trading and we still don't know where the bottom is going to end up. It will be interesting to see where things stand at the end of the year. Pension plans suffer huge losses Report says weak markets, credit crunch have drained $280 billion from plans of largest U.S. companies By Lara Moscrip, CNNMoney.com contributing writer July 8, 2008 NEW YORK (CNNMoney.com) -- Falling stock markets around the globe and the credit crunch are putting the pension funds of some of the largest U.S. companies into deeper financial holes, according to a report released Monday. Since the credit crunch hit last fall, pension plans funded by S&P 1500 companies have lost about $280 billion in assets, according to an actuary at Mercer, a human resources consulting firm. On paper, the losses from last October tally $160 billion. However, according to Mercer actuary Adrian Hartshorn, the asset losses are closer to $280 billion when pension plan assets and liabilities are considered together. The assets, which totaled roughly $1.7 trillion at the end of October 2007, fell by 17%, leaving about $1.4 trillion in assets at the end of June. Companies should be concerned, he said, because - assuming no change in the market - a typical U.S. company can expect their pension expenses to increase between 20% and 30% in 2009. That's due to the higher cost of servicing the pension plan's debt and the smaller return from the plan's assets. "I think it's important for corporations to be aware of what's going on in their pension plans, as corporations would be concerned when any part of its business is performing badly," Hartshorn said. According to the report, the total losses on pension assets and liabilities from the last day of 2007 through the end ofJune has grown to more than $80 billion. Part of the loss has been reflected in companies' current financial statements, but many losses incurred since the end of 2007 have yet to hit company balance sheets. The affected pension plans are qualified and non-qualified plans. Links that might be useful: money.cnn.com/2008/07/07/pf/retirement/pension_losses/index.htm Fat pensions spell doom for many cities money.cnn.com/2008/06/02/pf/retirement/vallejo.moneymag/
...See More
convert ira to roth ira?
Q
Comments (8)
I had seen an article on this subject in the WSJ, so I needed to do a search to pull it up again. Here's the pros and cons: WSJournal Investing, November 2, 2008 IRAs May Be Ripe For Shift to Roth One of the simplest ways to take advantage of the continuing market turmoil: Convert your battered investments from a traditional individual retirement account to a Roth IRA. When you convert traditional IRA assets to a Roth, you have to pay the income taxes upfront on the account's value -- and in some cases, those values may be next to nothing at the moment. With a Roth IRA, there are generally no taxes on withdrawals or any future earnings, unlike with traditional IRAs. There's also no mandatory distribution schedule -- again in contrast with traditional IRAs, from which account holders must begin taking minimum distributions by April 1 of the year following the year they turn 70 years old. Plus, you can leave a Roth account intact for your heirs. (Heirs other than your spouse would have to take required withdrawals each year, but they generally wouldn't owe any tax on them.) To be eligible to convert traditional IRA assets to a Roth, your income must be $100,000 or less. So any hit that your paycheck has taken from the economic downturn might help you do a Roth conversion. (Starting in 2010, there is no longer an income limit for Roth conversions.) Neither a required IRA distribution nor the converted amount would count against the $100,000 income limit. If you are 70Â½ or older, you have to take this year's required distribution before converting any traditional IRA assets to a Roth. Withdrawal Rules Many IRA holders get tangled up in the "five-year" rule when they convert IRA assets to a Roth IRA: You have to hold those assets in a Roth for five years or until you turn 59Â½, whichever comes first, to make penalty-free withdrawals of converted amounts. Each conversion has its own five-year clock. But if you have already reached age 59Â½ and you convert traditional IRA assets to a Roth, you can withdraw the actual assets you convert at any time without worrying about a five-year deadline or penalties. It's a different story with any earnings on those assets: Again, you must have held a Roth account for five years to withdraw any earnings tax-free. But you don't need to worry about separating the converted funds from the earnings; that's because the withdrawal rules for Roth IRAs say that any distributions first come from contributions, then from conversions, and finally from earnings, says Ed Slott, an IRA consultant in Rockville Centre, N.Y. Chuck Bauer, a 62-year-old manager in Pittsburgh for Aker Solutions, an engineering and construction company, has a combination of market losses and lower-than-normal income this year. So he is taking the advice of a local financial planner, Bud Kahn, and converting his IRA to a Roth, he says. Mr. Bauer will have to pay about $29,000 in income tax on the conversion, but "we think the account has gone down about $32,000," says Mr. Kahn. "When the account recoups its losses, he will have made up the taxes that he paid. And then that recoupment is never going to be taxed again." Changing Your Mind What if you converted traditional IRA assets to a Roth earlier this year, and those assets have declined in value? In that case, you may want to "recharacterize" the Roth as a traditional IRA. It's a way, says Mr. Slott, to "erase the taxes" on value that has since disappeared. Frank Russo, a 66-year-old Verizon Communications retiree in Port Washington, N.Y., recharacterized IRA investments that he had converted to a Roth after watching their value fall at least 15%. "I don't have to pay tax on an amount that no longer exists," he says. To do a recharacterization,you have to use a "trustee-to-trustee" transfer, also called a direct rollover or direct transfer, to move the contribution from one IRA to another. Don't touch the money yourself, and make sure no checks get made out directly to you or deposited in your bank account. The assets are treated as if they never left the traditional IRA, Mr. Slott says. If you recharacterize your Roth as a traditional IRA by Nov. 30, you could then convert the lower-value assets to a Roth again as soon as Jan. 1, he adds. See IRS Publication 590, at www.irs.gov, for information about traditional and Roth IRAs.
...See More
IRA/CD withdrawal questions
Q
Comments (7)
No, maifleur, you're on the wrong track angel, there's a procedure called a "tax free rollover" which is what's used to move an IRA balance from one financial institution to another. As the name says, it's tax free. There is no dollar limit on how much can be moved but it may be doable only one time per year (that's unclear but it's the IRS's position) and I think a rollover has to go to just one destination, and not three, but on that I'm not sure. It is a procedure, it needs to be done a certain way, but this is vanilla and a daily event to any institution holding IRA and other retirement plan balances. Your local bank should NEVER let you do what you did, they should have cautioned you. My suggestion at this point is you may need to get a CPA to help you, and expect in advance than many will have no experience with this. I would also go to the bank, tell them you relied on them and they let you down. Next, try to completely unwind what you did by closing the accounts you opened and getting the money back into the local bank IRA in its entirety. The local bank needs to cooperate with you to allow you to do this. Then, start all over again. When you do a tax free rollover, the check for the full balance is usually made payable to the institution the new account is located, not to you. Send the check to one place - Vanguard is a good choice. If you're not able to unwind and start again, you won't be happy with the outcome. What you've done is called an "early withdrawal of the IRA" since you're not yet 59 1/2. In addition to the gross amount being subject to income tax for you this year (which is always the case when an IRA account is distributed), the early withdrawal causes you to be subejct to an added 10% penalty. That's why you want to unwind what was done and start again. I hope it's possible but maybe not Good luck, report back how you fare.
...See More
punamytsike
15 years ago
last modified: 9 years ago
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
christine
Original Author
15 years ago
last modified: 9 years ago
punamytsike,

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
triciae
15 years ago
last modified: 9 years ago
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 example...you 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.

/tricia
christine
Original Author
15 years ago
last modified: 9 years ago
Tricia,

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, however...how 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 out...so 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!
triciae
15 years ago
last modified: 9 years ago
Christine,

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.

/tricia

Transferring 401K to Traditional IRA in this volatile market

Comments (7)

punamytsike

jakkom

Related Discussions

punamytsike

christine
Original Author

triciae

christine
Original Author

triciae

COMPANY

BUSINESS SERVICES

GET HELP

CONNECT WITH US

Transferring 401K to Traditional IRA in this volatile market

Comments (7)

punamytsike

jakkom

Related Discussions

punamytsike

christineOriginal Author

triciae

christineOriginal Author

triciae

COMPANY

BUSINESS SERVICES

GET HELP

CONNECT WITH US

christine
Original Author

christine
Original Author