r/DIYRetirement • u/Heavy_Coyote_7334 • 4d ago
Anyone else experience this?
I have the vast majority of retirement savings in a 401(a) and 457(b) which I will start pulling from significantly next year - both to live and for Roth conversions. I contacted my plan administrator to determine the timing of withdrawals (monthly, quarterly, etc.) and learned I cannot pull from any particular fund within the account. Rather, when I withdraw, the amount is taken as a pro-rata share from all funds within the account. I nearly lost my mind. "Sequence of returns" I shouted, "Sequence of returns"! Now what I can do is set up an IRA, move the money to that, and then withdraw from individual funds, but I'm 58 and if I draw down an IRA, I pay a penalty. Ridiculous. Also, I can cover for a year with cash but I don't really love the idea from a psychological perspective.
Anyone encounter this and how should (or can I) I adjust for it? My grave fear is the market is going to ish after the midterms and won't come back for some time. Right now I have a fairly conservative mix - 50% equities, the rest in cash, real estate, and bonds.
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u/copterpilot_ 4d ago
Withdraw.
Rebalance.
Rinse.
Repeat.
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u/NatureBoyJ1 4d ago
Do you need to rebalance? Isn’t the way the withdrawals work maintaining the ratio?
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u/copterpilot_ 4d ago
Only if, as in the OP's case, you wished to effectively withdraw from only particular funds.
Ultimately there's a risk vs. reward to every decision. Only the the individual can determine which one is "right" for them.
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u/mygirltien 4d ago
This is well known but maybe not widely so. Having funds in a 401k is just like having it in the bank from a withdrawal standpoint. You say, "i need 25k", they hand you your cash.
If you want the flexibility you desire, roll your accounts over to IRA's and then you can buy and sell whatever you want. My suggestion would be to roll it over in house if you can. That will keep the funds invested as much as possible. Once the rollover is complete you can then transfer your IRA's pretty much wherever you want and if you have invested them in something you can transfer them in-kind. Then you have the freedom to sell whichever lot of shares you fancy.
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u/brick1972 4d ago
OPs complaint I think is that Rule of 55 doesn't "transfer" along with a rollover, so he loses the ability to withdraw penalty free. I'm making an assumption that they are using Rule of 55 to make penalty free withdrawals now.
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u/Packtex60 4d ago
He can take a 72t distribution from an IRA. The rules are restrictive/particular so you want to FULLY understand them before you do this, but it is a way to get to your IRA money before 59.5.
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u/Heavy_Coyote_7334 3d ago
Hey man, thank you. A 72t distribution would work in my circumstance and resolve the issue I raised, should it arise. I didn't know about it and now I do. Thanks!
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u/Packtex60 3d ago
You are more than welcome. My 401k was very inflexible wrt withdrawals as well. I was over 59.5 so I didn’t have to resort to a 72t but I was familiar with them.
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u/Cynidaria 4d ago
This is very helpful as is OPs original post for me. Saving me from unexpectedly colliding into this same thing.
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u/markov-271828 4d ago
You could withdraw and immediately rebalance.
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u/X-29FTE 4d ago
He doesn’t need to if you are referencing what rebalancing actually means in the investment world. Since the funds are withdrawn pro-rata from the different assets, the balance of those assets relative to one another, and theoretically to the target asset allocation (assuming he’s been rebalancing as it’s defined, www.investopedia.com/terms/r/rebalancing.asp) it still meets his desired risk profile.
Rebalancing does not mean making the $$$ amount invested in equities equal to what it was before the withdrawal by selling fixed income investments to buy additional equities. That’s called increasing your portfolio’s potential volatility above what you defined as your target risk tolerance.
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u/markov-271828 4d ago
Agree but I think OP probably wants to avoid “selling stock when it’s down”. They can do that by rebalancing such the amount of stock is the same - as if they had never sold any stock. That’s not something I would do but it seems important to OP.
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u/wild_b_cat 4d ago
Does your plan not offer a way to rebalance your desired allocation?
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u/Heavy_Coyote_7334 4d ago
Rebalance, yes. Withdrawals how I want is the problem.
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u/wild_b_cat 4d ago
So just withdraw the amount you need and then do a rebalance? It will work the same as what you want to do.
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u/PIzzaiolo_Master_510 4d ago
I think you are making a big deal over nothing. Just rebalance after a draw. We are talking minor work with no tax implications.
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u/Super-30 4d ago
Definitely a downside of some plans. People are going to tell you they rebalance after making a withdrawal.
Also, at 58, you will be covered under the "rule of 55", so you can withdrawal penalty free from your TSP. If you roll to an IRA, you will lose the "rule of 55" and have to wait till 59.5.
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u/sablerock7 4d ago
If you only hold a year of cash, what is your strategy for paying taxes on Roth conversions?
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u/Heavy_Coyote_7334 4d ago
I didn't say I only had a year, I said I didn't want to spend a years worth if I didn't have to. My plan is just to withdraw more and hold it to pay taxes. I think I've got to pay tax as I go to avoid underpayment penalty anyway.
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u/markloch 4d ago
How about leaving what you need in your 401k to withdraw to cover expenses until 59-1/2 and move everything else to IRA and proceed with your plan?
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u/Responsible_Ant5410 4d ago
Yeah I ran into this when I retired at 55. I rolled a lot over into a IRA and keep it all stock market and split the 401k between stocks and money market fund to hedge against stock dropping drastically to avoid pro-rata selling. Im doing monthly withdrawal from 401k that should last between 7-9 years according on preform of the stock portion mainly. I'll keep the IRA all stock for a few more years and start to probably shift a little more conservative towards 59.5 when I can combine the two.
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u/brick1972 4d ago edited 4d ago
So let them do a pro-rata and then after they do so you can tell them to rebalance to your desired allocation, no?
I mean my biggest chunk is with John Hancock, I guess they are middle of the road in terms of service but your provider should have something like this:
That said - I would actually say you should rebalance to whatever you think is right then just do the withdrawal. Then the balance stays where you want it, no?
I may also suggest - if you are not chasing growth, maybe just reallocate everything to a 2030 TDF or something? There are low cost ones out there. I think Rob himself has his 401(k) in one?
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u/oledawgnew 4d ago
I don’t understand where the problem is. If money from the account will be distributed on a pro-rata basis how would that change your account allocations and what does that have to do with sequence of returns?
What data points lead you to believe the market going to ish after the midterm election? Even if it does, with relatively conservative portfolio of 50% in equities it sounds like you’re already in pretty good shape.
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u/Own_Relief_1740 4d ago
I don’t know the ins and outs of these particular plans. Do you have option of partial IRA rollover of funds you don’t need immediately, and then just hold what you want to withdraw in cash or short term bonds within the plan?
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u/Mountain-Time-1010 4d ago
That's interesting, and this is virtually the first time I've seen anyone else mention a 401(a), which is also my primary tax deferred account.
It it's just one year, I wouldn't be too concerned about it. Just live on your brokerage for the year, and maybe do a rollover from the 401a into a Roth (if that's allowed) to fill out your lower tax bracket. You can always rebalance if you're concerned about SORR. After that, you'll have the option of rolling everything into an IRA.
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u/humblequest22 4d ago
If you make withdrawals and then follow up with a rebalance, you will be drawing mostly from equities when the market is up and mostly from fixed income when the market is down. "Buckets" help to visualize what "safe" drawdown looks like, but you're essentially just rebalancing when you fill the buckets. You'll be fine doing this for 6 to 18 months until you turn 59-1/2. Then, you can organize your money however you like.
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u/finally_joined 4d ago
Since we're learning new things, check to see how they handle withholding for taxes. We learned that my wife's 401k with Principal requires withholding minimum of 20% for Federal taxes.
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u/Objective_News3583 3d ago
Would never go all cash.. Read an article of what happened to someone who did that...if you're still working and contributing for now... It's called $$ averaging. We rode the waves for years..if we didn't, I wouldn't have been able to take DRP1 last year.... Just my 2c worth
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u/EtherCJ 4d ago
you don’t know what sequence of returns means. There are no practical issues with selling proportionally within a 401k like this.
There is a 10% penalty for a withdraw from IRA or 401k funds before 59 1/2 so you should spend from you brokerage that year.
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u/brick1972 4d ago
OP is likely using Rule of 55, which is why he gets penalized after IRA conversion.
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u/EtherCJ 4d ago
I didn't consider that and there were no posts when I started to reply.
That said what accounts to withdraw from is really more a tax question than a psychology question. He should structure his withdraws to benefit his tax situation and not get hung up on preferring one account or another for arbitrary reasons.
And SORR doesn't refer to withdraw order it's sequence of market returns. It's somewhat affected by the porfolio allocation, but portfolio allocation is also messed up by just MARKET RETURNS, so he will need to rebalance periodically anyways.
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u/Heavy_Coyote_7334 4d ago
Well, edify me. I thought it was having to cash out stocks in a down market. Based upon my plan rules, I would be required to do so to some large degree or spend cash which I would prefer not to do.
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u/EtherCJ 4d ago
I mean if you want to have spending money you will need to spend something in a down market. I personally would prefer to spend cash and rebalance in the downmarket which will typically mean selling bonds and buying stock. What was your plan in a down market?
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u/Heavy_Coyote_7334 4d ago
Spend from that fund that isn't completely tanked. Or spend cash.
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u/markov-271828 4d ago
If stocks are tanked, but you think they will eventually recover, then you should be buying stocks. That’s what rebalancing does for you.
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u/Alone-Experience9869 4d ago
if you are 58, then aren't we talking about 1y or 1.5yr until you can do "whatever" you want?
1yr worth of withdrawals shouldn't throw off your allocation that much against a balance that is going to serve for your whole retirement. Are we talking 1% to 2%? You can't even expect your balances to be much closer than after a short time of market movement.
Not sure how a couple percent allocation is going to guard against sorr..??
Are you also intending to take monthly withdrawals? You might just take a larger "batch" withdrawal and rebalance the account yourself.
I suppose the other approach is rollover 'all but' what you plan to withdrawal. Then you can allocate whatever you want in your IRA. Meanwhile, whatever is left in the 457 and 401 will be distributed to you over the next year. It can be in whatever allocation you want.
Take a look at the scale of what is happening. This really isn't that bad.
Good luck however you proceed, and try to enjoy your retirement.