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How to avoid or hedge rollover limbo?

About half of our retirement savings is still sitting in the 401K accounts for my wife’s and my former employer. It’s a good 401K plan with a range of index funds, low expenses and a decent stable value fund. We’ve been rolling over some of the funds each year to Roth IRAs, at a rate that doesn’t bump us up to a higher tax bracket. Eventually, I would also like to transfer the remaining funds to our existing Rollover and Roth IRAs.

Here’s the rub. Every time we do a transfer or rollover, the money is out of the market for up to two weeks. The markets often make big moves in two weeks time, and I prefer to stay invested. In almost every case in which I moved funds, the markets went up, so I essentially lost money by being out of the markets. So far, the amounts haven’t been huge because I’ve transferred amounts ranging from $5,000 to $20,000. However, if I decided to move my entire 401K accounts, the amounts could be sizable.

Of course, the transfers could work in my favor if the markets dropped during the time that my 401K funds are sold and reinvested two weeks later — but it never seems to work that way.

Does anyone have any ideas for speeding up the rollover/transfer process or hedging the potential losses?

Comments

  • I don't know if this applies to you but both my T-IRA and Roth accounts are with Fidelity. When I convert the T holdings to the Roth it's nearly instantaneous. No fuss, no muss.
  • Do your 401k plans have any special requirements to withdraw the money? This question could apply to whomever is receiving the rollover.
    One of our rollovers to an existing T-IRA required that Fidelity provide a "letter of acceptance" to the 401k custodian.............basically, a YES you are loosing your customer and Fidelity is and will accept the money. DUH ??? So, this transaction took 2 weeks because of postal mail time.
    On the other hand, I rolled a 401k operated by Vanguard to move the money to Fidelity; and Fidelity called "their" Vanguard contact, with myself and the 2 of them on the phone. I provided security information that satisfied Vanguard's requirements and the rollover took place electronically between the two parties. I received paper confirmation about 5 days later from both.
    I can't provide help with concerns for market place happenings during the transfer idle times. At best, this means nothing; at the very least this is not more than a coin toss for any 2 week period of the markets, yes?
  • I believe that 401(k) withdrawals have to be initiated on the 401(k) side, unlike IRA transfers/conversions. Often a 401(k) holding is a security that cannot be transferred in kind so liquidation is mandatory. Between having to liquidate holdings and rollovers taking weeks, it's understandable that one would want to hedge the market.

    To hedge equity transfers, you can identify some tax-sheltered money that you've got sitting in cash or near cash, or absent that, some reasonably vanilla bond fund that's easily bought and sold. It doesn't have to be in the same place where you're going to transfer the 401(k), it just needs to be in some tax-sheltered account.

    Simultaneously use that cash to buy an equity holding and sell the same amount of the equity holding in the 401(k). Then transfer the cash. You now have a new stash of cash available. Rinse and repeat. After the final transfer, use the cash to repurchase the near cash or bond holding that you sold off at the beginning of this process.

    If the amount of cash you've got to play with is small and if it takes a couple of weeks to to a transfer, you could be at this for months. Still, you're not going anywhere, so it's just a matter of time and patience.

    An alternative, if your 401(k) custodian also provides no-fee IRAs is to have the 401(k) rollover done "in house". For example, Fidelity, Vanguard, etc. often operate companies' 401(k) plans. In house rollovers are usually much faster than rollovers between financial institutions

    Even if you aren't excited by the IRA options, so long as they're adequate, they'll do for the purpose of keeping you in the market. You can either do a straight pre-tax rollover followed by a conversion, or a direct rollover conversion.

  • edited January 2020
    @msf makes good sense. I can’t improve on that. I’m about to go through something like that moving a bit from a Roth IRA at Invesco to a Roth at TRP. Rather than try to explain it (gets complicated), let’s just say that it helps to have some “duplicate” accounts at Price. For TMSRX, RPSIX, RPGAX I maintain both Traditional and Roth IRAs there. Allows a lot more flexibility when transferring money, rebalancing or taking distributions. Price imposes their trading restrictions (essentially a 30-day lock) separately on the Traditional and Roth accounts, making it easier to move money. (Example: I can purchase shares of RPGAX in the Roth and, on the same day, sell an identical number of shares of RPGAX from the Traditional without penalty.)

    If you’re feeling lucky, you can attempt to guess when the market’s about to take a tumble. Initiate the transfer at that time. Later, when the money arrives, it will reinvest at a discounted NAV. Not recommended!:)
  • @msf — Your suggestion was the best that I could think of as well. I don’t hold any cash in my IRAs but have some reasonably safe bond funds that could suffice.

    I suppose that I could also initiate a series of smaller transfers that would minimize the amounts of money out of the markets at any one time, and that might also increase the odds that the some of the rollover work in my favor. It’s just a lot more trouble doing it that way.
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