Potential loss of gain risk from transferring from 401k to IRA/TSP

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highspeedz
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Joined: Sun Oct 04, 2020 8:08 am

Potential loss of gain risk from transferring from 401k to IRA/TSP

Post by highspeedz »

Question: What is the best way to transfer money from one brokerage to another and minimize time out of the market?

Background: I recently changed jobs. I decided to transfer my funds out of my company 401k due to the fact that my 401k has high fees (~1%), I decided to transfer the funds from my 401k to my military Thrift Savings Plan (TSP). I am retired military so still have access to my TSP. This topic also applies to anyone transferring to an IRA as well. Total value of 401k was ~370K invested almost entirely in S and C fund (index funds to the market). I kind of was "lucky" that the time the money was in transit from the 401k to the TSP the market went down slightly, but if it went up I think it would have bothered me to "lose out" on the gain. In my case, I paid extra to have the check overnighted and the total time out of the market was about 4 days.

I guess what I am thinking, is if the market had an upswing of 2-3%, I could easily have lost over 10K in gains, and this kind of bothers me. Did I do the best strategy, would it have been better to move the money in smaller chunks or another strategy?

More background: The reason I put the money in the TSP and not an IRA is I do a back door Roth every year, so I didn't want to put the money in an IRA to avoid the "pro-rata" rule. Also, about ~270K of the transfer was in a Roth 401k, so I eventually want to move that to Vanguard as well.
Lionel Hutz
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Re: Potential loss of gain risk from transferring from 401k to IRA/TSP

Post by Lionel Hutz »

If going from one qualified plan to another (401k to TSP) oftentimes the only way is a check. So you made the right call by paying a small fee to expedite the check.

If rolling from a qualified plan to an IRA, there could be an option to cut down on the time out of the market. Open an IRA at the same firm as the 401k and do the rollover. This will likely be some sort of internal money transfer instead of a check, lessening the time out of the market. Then you can transfer in-kind to the IRA at your desired firm.
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grabiner
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Re: Potential loss of gain risk from transferring from 401k to IRA/TSP

Post by grabiner »

If you are moving only part of your portfolio, you can move stocks to the account not being transferred. For example, you can move money from stocks to bonds in the 401(k), and from bonds to stocks in the IRA/TSP, then roll over the 401(k).

But the risk of being out of the market for a short time isn't that great. If the stock market rises an average 8% a year, then the expected loss from being out of the market for a week is 0.15%. You could lose 5.15% by missing a rising market, but you could just as easily avoid a loss of 4.85%
Wiki David Grabiner
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highspeedz
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Re: Potential loss of gain risk from transferring from 401k to IRA/TSP

Post by highspeedz »

grabiner wrote: Tue Jun 06, 2023 8:08 pm If you are moving only part of your portfolio, you can move stocks to the account not being transferred. For example, you can move money from stocks to bonds in the 401(k), and from bonds to stocks in the IRA/TSP, then roll over the 401(k).

But the risk of being out of the market for a short time isn't that great. If the stock market rises an average 8% a year, then the expected loss from being out of the market for a week is 0.15%. You could lose 5.15% by missing a rising market, but you could just as easily avoid a loss of 4.85%
I actually like this idea. If I understand you correctly, you are saying just shift around the stock/bond ratio so that the bonds are in the account I am transferring from and move the stocks in an account I am not transferring from. So when I do the transfer and the 401k brokerage converts to cash to mail the check, they are cashing out bonds instead of stock, which (mostly) should be less risk. This method keeps the overall stock/bond ratio the same across my entire portfolio, but allows less risk on the transfer.
Fishing50
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Re: Potential loss of gain risk from transferring from 401k to IRA/TSP

Post by Fishing50 »

I’m extremely satisfied with my Roth IRA consolidation at Schwab from TSP.
I hold Vanguard funds and received a transfer bonus.
https://www.bogleheads.org/forum/viewt ... 8#p7034588
Retired Military Officer. 80% equites / 20% bonds for life, ZERO emergency fund, 100% taxable in equities (dividends in cash), 33% taxable, 30% Roth, 37% tax deferred. Gone Fishing At 52yrs old!
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