How best to rollover 401k to IRA?

[Newventurer]

As I plan for retirement I am interested in input on how best to reinvest the money (approx $450k) that I will rollover from my company 401k to my Schwab account.

What are your thoughts on the period of time one should take to dollar cost average the money back into the market. I plan to use an all ETF portfolio 70/30 - stocks/bonds.

Thanks.

 

[Midpack]

Not the answer you're looking for, but I reinvested my 401k & (frozen) pension lump sum rollover funds at Vanguard within a month or so. DCA if you prefer, nothing wrong with that approach either. I can find credible articles for and against, DCA does not ensure a profit or prevent a loss...

 

[scrabbler1]

Aren't there tax rules for doing a direct rollover from a 401(k) to an IRA? That is, you have to do the rollover within 60(?) days or else face tax penalties (even if you can recover the money later)? When I left my company, I had to liquidate my 401(k) and did a direct rollover into an IRA about a week after I got the check which was made out to the new IRA administrator (Fidelity) to shield me from any tax issues.

Therefore, doing DCA was not an issue because the rollover was a lump sum.

 

[jebmke]

Aren't there tax rules for doing a direct rollover from a 401(k) to an IRA? That is, you have to do the rollover within 60(?) days or else face tax penalties (even if you can recover the money later)? When I left my company, I had to liquidate my 401(k) and did a direct rollover into an IRA about a week after I got the check which was made out to the new IRA administrator (Fidelity) to shield me from any tax issues.

Therefore, doing DCA was not an issue because the rollover was a lump sum.

Two issues - direct vs. indirect. Direct is trustee to trustee. You never get the funds in your name. Indirect is a distribution to you for which you have 60 days to roll back (deposit in) to IRA.

Either way, you can DCA or not within the IRA.

 

[Alan]

Two issues - direct vs. indirect. Direct is trustee to trustee. You never get the funds in your name. Indirect is a distribution to you for which you have 60 days to roll back (deposit in) to IRA.

Either way, you can DCA or not within the IRA.

That is also my understanding.

 

[frayne]

That is also my understanding.

Mine too but I would strongly advise trustee to trustee. When not a trustee to trustee transfer, I have seen withholding taken out for tax purposes and then the same amount not being put into the IRA. This creates a painful tax event. As fas as DCAing into an IRA, you must have earned income, just in case you might not be aware.

 

[Alan]

Mine too but I would strongly advise trustee to trustee. When not a trustee to trustee transfer, I have seen withholding taken out for tax purposes and then the same amount not being put into the IRA. This creates a painful tax event. As fas as DCAing into an IRA, you must have earned income, just in case you might not be aware.

We did our rollovers trustee to trustee, never even considered getting a distribution to our bank as an intermediate step. As you say, too many issue to catch you out.

I wasn't aware of the earned income necessary for partial rollovers in a DCA situation.

 

[rothlev]

For simplicity sake when I did mine, I think I had to consolidate the shares so that it could be done in one transfer. ( moved everything to money market) and then rolled it into a money market at Vanguard ( direct transfer) from there I bought what I wanted when I wanted. When you are doing a rollover the earned income rule does not come into play, that would involve new money.

 

[frayne]

Mine too but I would strongly advise trustee to trustee. When not a trustee to trustee transfer, I have seen withholding taken out for tax purposes and then the same amount not being put into the IRA. This creates a painful tax event. As fas as DCAing into an IRA, you must have earned income, just in case you might not be aware.

Maybe I wasn't clear and a better way to put it, once a traditional IRA is setup, any monies going into it, must be from qualified compensation. The rules for rollovers and other scenarios should be researched in depth before pulling the trigger. Personally I am not upon all of the rules as there are many and many money managers and tax pros aren't too conversant either,



From IRS Pub 590

Table 1-1. Compensation for Purposes of an IRA


Includes ... Does not include ... earnings and profits from
property. wages, salaries, etc.interest and
dividend income. commissions.pension or annuity
income. self-employment income.deferred compensation.alimony and separate maintenance.income from certain
partnerships. nontaxable combat pay.any amounts you exclude
from income.

What Is Not Compensation?






Compensation does not include any of the following items.

• Earnings and profits from property, such as rental income, interest income, and dividend income.
• Pension or annuity income.
• Deferred compensation received (compensation payments postponed from a past year).
• Income from a partnership for which you do not provide services that are a material income-producing factor.
• Conservation Reserve Program (CRP) payments reported on Schedule SE (Form 1040), line 1b.
• Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs.

 

[steelyman]

Maybe I wasn't clear, once traditional IRA is setup, any monies going into it, must be from earned income.

But not in the case of a 401(k) to rollover IRA, I think. It was earned income that went into the 401 to begin with. I favor rothlev's approach: do the transfer and then worry about how and when to deploy.

Apart from that, it wasn't said how the 401(k) funds are currently invested; in my case, a 403(b)-to-IRA rollover was simple as I just left the same allocation. It was kind of like moving socks from one drawer to another.

Regarding the original question: it seems to me to be a little trickier to dollar cost average into ETFs than into mutual funds but I think a 12-24 month period would be reasonable. But that is not necessarily what I would do, since I did the dollar cost averaging with the original contributions (however, I am not an expert).

 

[pb4uski]

As I plan for retirement I am interested in input on how best to reinvest the money (approx $450k) that I will rollover from my company 401k to my Schwaab account.

What are your thoughts on the period of time one should take to dollar cost average the money back into the market. I plan to use an all ETF portfolio 70/30 - stocks/bonds.

Thanks.

When you say 401k to Schwab account, I assume that you mean 401k to Schwab IRA account so you will not pay taxes on the $450k. I did a similar 401k rollover in early 2012. My 401k issued a check to Vanguard (Schwab in your case) FBO (for the benefit of) [my name] and mailed it to me. I photocopied it and sent it to Vanguard with the requisite paperwork for them to deposit it into my IRA. A direct transfer from your 401k provider to Schwab is preferable IMO but a check can work. the thing you want to make sure of is that the check is not made out to you.

I terms of investing it - if it was 70/30 in the 401k and you move it 70/30 into similar funds it shouldn't make much difference. If it was in cash you may want to value average in over a set period of time. Value averaging is a bit different than dollar cost averaging and results in investing more when prices are relatively low and less when prices are relatively high.

 

[Newventurer]

When you say 401k to Schwab account, I assume that you mean 401k to Schwab IRA account so you will not pay taxes on the $450k. I did a similar 401k rollover in early 2012. My 401k issued a check to Vanguard (Schwab in your case) FBO (for the benefit of) [my name] and mailed it to me. I photocopied it and sent it to Vanguard with the requisite paperwork for them to deposit it into my IRA. A direct transfer from your 401k provider to Schwab is preferable IMO but a check can work. the thing you want to make sure of is that the check is not made out to you.

I terms of investing it - if it was 70/30 in the 401k and you move it 70/30 into similar funds it shouldn't make much difference. If it was in cash you may want to value average in over a set period of time. Value averaging is a bit different than dollar cost averaging and results in investing more when prices are relatively low and less when prices are relatively high.

Yes it is a Schwab IRA, guess that would have helped a few other respondents...

My 401k doesn't have the breadth of choice as the IRA, and certainly not Schwab ETF's so my new investments will not be the same as the ones in the 401k.

Still interested in any other thoughts on timing on putting the money back to work.

 

[pb4uski]

What was the $450k invested in (broadly, not tickers)? If in some broad based stock and bond funds, I would just dive right in and perhaps adjust to your target AA at the same time if it is a little out of whack. In other words, even if you think equities are high right now you are selling high and buying at the same level.

If you were in cash then I would value average in. As an example, let's say you were all in cash and want to value average $315k into equities over 12 months - that would be ~26k a month. So make an initial investment of $26k. Then a month later made an additional investment to bring the balance up to $52k. Then a month later made an additional investment to bring the balance up to $78k. So on and so forth until you have invested the entire $315k.

 

[Newventurer]

What was the $450k invested in (broadly, not tickers)? If in some broad based stock and bond funds, I would just dive right in and perhaps adjust to your target AA at the same time if it is a little out of whack. In other words, even if you think equities are high right now you are selling high and buying at the same level.

If you were in cash then I would value average in. As an example, let's say you were all in cash and want to value average $315k into equities over 12 months - that would be ~26k a month. So make an initial investment of $26k. Then a month later made an additional investment to bring the balance up to $52k. Then a month later made an additional investment to bring the balance up to $78k. So on and so forth until you have invested the entire $315k.

I had half of it in a 2025 target fund and the rest in a money market so my AA will be completely different and better diversified. Thanks for your feedback.

 

[steelyman]

I had half of it in a 2025 target fund and the rest in a money market so my AA will be completely different and better diversified. Thanks for your feedback.

Don't make it more complex than it needs to be. You've got a pile of money you want to move from point A to point B.

Figure out where you want things to be at point B. More than just "better diversified". You can probably just send the money en masse to point B, ask the 401k administrator. Move the money and put it to work as you choose, but you still want to figure out what your allocation will be.

Ideally, it will be sitting there for a long time so trying to be clever about buying may not matter.

 

[Newventurer]

Don't make it more complex than it needs to be. You've got a pile of money you want to move from point A to point B.

Figure out where you want things to be at point B. More than just "better diversified". You can probably just send the money en masse to point B, ask the 401k administrator. Move the money and put it to work as you choose, but you still want to figure out what your allocation will be.

Ideally, it will be sitting there for a long time so trying to be clever about buying may not matter.

Here's what I am looking at:

schb - 35% US Broad Market
schf - 20% International
sche - 5% Emerging Markets
schz - 15% US Aggregate Bond
schp -15% US TIPS
schh - 5% US REIT
dbc - 5% Commodities

"so trying to be clever about buying may not matter"

Point taken

 

[steelyman]

Here's what I am looking at:

schb - 35% US Broad Market
schf - 20% International
sche - 5% Emerging Markets
schz - 15% US Aggregate Bond
schp -15% US TIPS
schh - 5% US REIT
dbc - 5% Commodities

"so trying to be clever about buying may not matter"

Point taken

Cool! Hit the button, buddy

 

[growing_older]

Trustee to trustee is best if you can manage to do it. If not, then just get it there quickly before the time expires.

If the money was invested before you started the transfer, then wouldn't you want to get it back into an asset allocation much like it was, as fast as you can. Just because you moved to cash temporarily for the mechanics of the move is no reason to have those funds out of the market while you dollar cost average back in.

 

[Animorph]

I'd keep it invested, with as short a gap as possible. I was able to do my rollover "in kind", moving the shares in my Fidelity 401k into a Fidelity rollover IRA. Then I was able to modify the AA with the wider range of funds available without converting the whole thing to cash first.

If you have to rollover in cash, I favor tracking the prices of what you want to buy on the day you liquidated and then buy them whenever they are at that price or lower. That way you take no hit from the rollover, and can come out a little ahead. The risk is that they go up and never come down, but what's the chances of that happening?

 

[Newventurer]

Well this just came in this morning, very timely. Thanks to all who responded.

Investing a lump sum of money in stocks pays off - Weekend Investor - MarketWatch

Note: There is an embedded Vanguard study in this article. Good stuff.

 

[Finance Dave]

Aren't there tax rules for doing a direct rollover from a 401(k) to an IRA? That is, you have to do the rollover within 60(?) days or else face tax penalties (even if you can recover the money later)? When I left my company, I had to liquidate my 401(k) and did a direct rollover into an IRA about a week after I got the check which was made out to the new IRA administrator (Fidelity) to shield me from any tax issues.

Therefore, doing DCA was not an issue because the rollover was a lump sum.

I think what he's saying is he could roll all of it at first into a "safe" fund such as money market, then move it via DCA to equities.

I don't think there's an exact answer for the timeframe...but I'd do it over about 9-12 months. That said....if we see a market correction of about 5-8% or more...I'd get it in there more quickly.

 

[bssc]

I did a trustee to trustee transfer years ago. One thing to keep in mind is that in a 401(k) you can get at your money without a 72(t) if you are going to withdraw it from the year that you turn 55 until 59 1/2.

 

[scrabbler1]

What was the $450k invested in (broadly, not tickers)? If in some broad based stock and bond funds, I would just dive right in and perhaps adjust to your target AA at the same time if it is a little out of whack. In other words, even if you think equities are high right now you are selling high and buying at the same level.

When I did my Rollover IRA in late 2008, I was faced with this same issue when I received the lump-sum check (not made out to me directly, of course) to present to the new trustee (Fidelity). By the time I emptied the 401(k) I had only 2 funds in there, an S&P 500 index fund and a stable return fund (which was most closely like an intermediate-term, investment-grade, corporate bond fund).

But I had forgotten to check the individual balances on the 2 funds on the day the 401(k) was emptied so I did not have the final AA I wanted to use to open 2 similar funds at Fidelity a week later. I did not think to call a rep at the 401k) trustee's office until the morning I went to Fidelity and he did not have that info readily available so I had to sorta wing it and make a best guess when I split the money up at Fidelity. Turns out I came pretty close, only 1-2% off from what it was (and I was okay with my "new" AA).

I could have simply dumped it all into Fidelity's cash account (Cash Reserves) and gradually bought shares of my desired funds. [ This appears to be more closely related to what the OP was asking about.] If I thought the rapidly unstable market was going to fall some more, this would have been a decent strategy as long as and forgone dividends would be recovered by buying at lower prices. I pretty much bought in at the bottom but then again I sold out (emptied the 401(k)) at the bottom, too.

 

[PatrickA5]

As BSSC aluded to above, if you leave your company in the year you turn 55 (or later) and you think you might need some of the money in the 401K before 59 1/2, you can take distributions from the 401k without the 10% penalty. If you're younger than 55 (or over 59 1/2) then this wouldn't apply to you.

Also, if you have any Traditional IRAs that were non-deductible (i.e. have basis) that you are considering converting to a Roth IRA, you should probably do that before you move this 401k money to an IRA.

 

[jebmke]

I did a trustee to trustee transfer years ago. One thing to keep in mind is that in a 401(k) you can get at your money without a 72(t) if you are going to withdraw it from the year that you turn 55 until 59 1/2.

Yes, also, in my state, 401(k) distribution qualifies for retirement income exemption when you reach 65 -- IRA distn does not. If you roll 401(k) to IRA you may lose this exemption if this is only source of qualified retirement income.