Avoiding a NAV loss in a 401k-to-IRA rollover due to Dec dividends

Submitted by Ron Smith on Wed, 2016-12-14 18:36

To qualify for a 2017 QCD, a 401k account rollover to a TIRA must be done by by 31 Dec. There may be be a change in administrators as well.
1. It was most helpful to learn that dividends are irrelevant! https://irahelp.com/forum-post/27910-take-rmd-or-after-mutual-fund-distribution
2. Concern over possible “loss” in the NAV of the new mutual fund (IRA) shares: would it work to buy the new IRA funds AFTER the Dividend Date, while parking the funds in a Money Market fund in the meantime?
3. Possible impact of changing administrators on 2017 QCD: w few days left in Dec, would it be wise and less stressful to rollover the 401k to a TIRA w/ the current administrator in Dec and move the TIRA funds to another administrator during January?
4.If so, how would the RMD or QCD from the TIRA (based on the 31 Dec balance of a closed account w/ a DIFFERENT administrator) be handled by the NEW administrator? Would a QCD be possible if there was no 31 Dec balance w/ the new administrator?
5. I know enough about this to be dangerous, so sound input is needed & welcomed. Thank you! RSmith



Submitted by Alan - IRA critic on Wed, 2016-12-14 21:01

  1. Not following this. You must be 70.5 to execute a QCD from an IRA account. However, for 2016 there is no IRA RMD because there was no IRA balance on 12/31/2015 since the money was in the 401k. Maybe you have an IRA balance from other IRAs you had at the end of 2015. Otherwise, you could not use a QCD to offset an IRA RMD because there is no IRA RMD. If you are planning a 2017 QCD, you have another year to execute that.
  2. If you are subject to RMDs from the 401k, the 2016 RMD must NOT be included in an IRA rollover. It must be paid to you in a separate check from the 401k. If the 401k RMD is rolled into the IRA, it becomes an excess IRA contribution. The 401k administrator should know that.
  3. Again, not sure why you are concerned with a 2017 QCD now. The urgency would only apply if you plan to try and squeeze in a 2016 RMD with a late December rollover. That would be difficult at this date unless the IRA custodian gets the rollover in a couple of days. To clarify the timing issues, a QCD is deemed completed not when the custodian mails the check to you to forward to the charity as most of them do, but the date that YOU mail out the check to the charity. That must be done by 12/31 for a 2016 QCD, but you have all next year to do a 2017 QCD.
  4. A QCD can be less than, equal to, or more than the RMD. If there is no RMD because you had no IRA balance on 12/31/2015, then the QCD will not offset an RMD. A QCD cannot be done directly from a 401k, must be from an IRA.
  5. Better clarify if you are already 70.5 or if not when that will be. Also, when did you retire from the 401k provider?
  6. Is it very complex with multiple timing issues to try and navigate a 401k rollover, RMD for the 401k, and QCDs in a limited time frame. Do you have other TIRA accounts, or will the 401k rollover be your first?

Submitted by Ron Smith on Wed, 2016-12-14 21:17

delete.

Submitted by Ron Smith on Wed, 2016-12-14 21:20

Sorry for the missing information and the resulting confusion:

  • I retired from the 401k provider during 2014
  • This is my only 401k
  • I passed 70 1/2 during 2015 & started RMDs that year
  • The 2016 RMD has already been paid on the 401k; it will not be part of the rollover.
  • The goal is to simplify my investments by moving the funds to a Traditional IRA – w/ a 2016 ending balance, while at the same time qualifying for 2016 QCD. (Late 15 Dec edit, should have said QCD next year, not 2016.)

Grateful for the new formatting options.

Submitted by Alan - IRA critic on Wed, 2016-12-14 23:34

OK, that clarifies things, and I will assume that this rollover IRA will be your only owned TIRA account. If you complete the 401k rollover VERY soon, while you can do a QCD if you wish and that would save money as opposed to making a typical charitable contribution and then deducting it, the QCD would not apply to an RMD because there is no IRA RMD for 2016. The RMD on this money was the 401k RMD you indicated has already been completed. You would have a 12/31/2016 IRA balance on which your 2017 IRA RMD would be calculated and you could do a QCD to offset some or all of your 2017 RMD. There is no way to offset the tax bill for the 401k plan RMD which has already been distributed. For 2017, to be safe you should do the IRA QCD before any other IRA distributions to make sure that it will offset taxes on your RMD up to the amount of the QCD. Note that if you did NOT complete the 401k direct rollover this year, and the direct rollover was in 2017, you would be in the same situation in 2017 that you are already in for 2016. The RMD for 2017 would be a 401k RMD, not an IRA RMD. Therefore, there is a real benefit to getting the 401k rollover done this year as that will set you up for a 2017 IRA RMD and QCD. Try to get the rollover done, but probably little benefit from trying to do a QCD unless you are going to make a 2016 donation anyway, since you cannot offset your 2016 401k RMD.

Submitted by Ron Smith on Thu, 2016-12-15 02:43

Wow!  A lot of helpful information!

  • “I will assume that this rollover IRA will be your only owned TIRA account.” Yes
  • “If you complete the 401k rollover VERY soon, while you can do a QCD if you wish and that would save money as opposed to making a typical charitable contribution and then deducting it, the QCD would not apply to an RMD because there is no IRA RMD for 2016.”  Thank you!  Had no idea that I could make a QCD (tho, not as a 2016 RMD) from a new IRA that had been funded during Dec 2016.
  • “….there is a real benefit to getting the 401k rollover done this year as that will set you up for a 2017 IRA RMD and QCD. Try to get the rollover done, but probably little benefit from trying to do a QCD unless you are going to make a 2016 donation anyway, since you cannot offset your 2016 401k RMD.”  Again, very helpful.   
  • (Added later) The goal in the rollover has always been to have the option of QCD, starting in 2017.  In the earlier post, I typed 2016 QCD in error but that led to the revelation of a 2016 QCD option on an IRA funded by a rollover during the last of Dec 2016.

Much obliged, Alan!  Have a blessed Christmas!

Submitted by Ron Smith on Thu, 2016-12-15 11:06

It took a while for the suggestion to register: the representative of the institution that will be receiving the rollover funds for the IRA suggested “parking” the funds in a money market account, rather than buying mutual funds immediately.  

  • Was he trying to help me avoid buying shares that will have a lower NAV after the dividends have been distributed?  
  • Would the suggested workaround be to 
    1. “Park” the rollover IRA funds into a money market account until after the NAV reflects the impact of the dividend distributions, and
    2. Then purchase the mutual fund shares at the lower (post-dividend) price?

    Your input is very much appreciated, Alan

    Submitted by Alan - IRA critic on Thu, 2016-12-15 16:13

    Not sure if you plan to do a QCD before year end or not since it will not offset the RMD that was already distributed from the 401k. But if you are going to do a 2017 QCD fairly soon, keep at least the QCD amount in a MM fund so you will not have to sell fund shares to do the QCD. The custodian can just cash in the MM funds for the QCD distribution.  Since this is an IRA there is no harm in purchasing fund shares before a dividend since the distribution is not a taxable event in the IRA, but no sense in buying fund shares if you are going to have to redeem them to do a QCD shortly afterward. In an IRA you are dealing with dollar amounts, so if you purchase 10k worth of a particular fund before the dividend (and reinvestment of that dividend), after the dividend you will have more shares but they will have a NAV proportionately less to exactly balance the increased shares. The value of your investment will still be 10k so there is no reason to be concerned with purchasing before or after the dividend distribution in an IRA like there is in a taxable brokerage account.

    Submitted by Ron Smith on Fri, 2016-12-16 16:12

    • 2016 QCD: I can’t see a benefit in having a 2016 QCD that would not offset the 2016 RMD.  We have been using our RMD for year-end giving (that is a partial offset to the taxes on the RMD).  A 2016 QCD at this point would remove the offsetting giving deduction & expose more of the RMD to taxes. 
    • Dividend timing: The concern is not about getting more shares w/ a lower NAV and essentially the same investment value, it is about
      • Buying stock after the date of record but before the dividend date
      • Missing the added shares from the dividends,
      • Ending w/ the original number of shares and a lower NAV – a net loss due to missing added shares from the dividend that would mitigate the lower NAV.  

      Am I confused about this? I am planning to

      • Park all the funds in a mm until after the dividend date,
      • And then invest the funds at the lower (post-dividend) NAV. 
      • (Added later) Could this strategy yield more potential capital gains in a rising market when the NAV is higher than the original purchase, “dividend-depreciated” share price?

      Is my thinking right on that? Much appreciated, Alan.

      Submitted by David Mertz on Fri, 2016-12-16 18:57

      The Record Date and the Ex Dividend date are normally one business day apart, so it’s generally not possible to buy after the Record Date but before the Ex Dividend date.  You’ll either own the shares on the Record Date and receive the distribution or you’ll buy the shares at the lower NAV that results from the distribution.

      Submitted by Ron Smith on Sat, 2016-12-17 16:55

      TY, DMx, for your help!  My focus has been more on the Date of Record and the Date of Distribution than Ex Dividend Date.  Any help understanding any potential pitfalls related to buying shares around dividend distributions would be much appreciated.

      • How/where do  you find the Date of Record and the Ex-dividend date? They are not easily found in a prospectus, while prior Dates of Distribution are freely available on M*, etc..  
      • Which date actually affects the NAV?  The Ex-Dividend Date or the Distribution Date?  When I tried to follow it closely, it appeared that the hit on the NAV occurred on the Distribution Date.  
      • This week the NAV of some investments took more of a hit than the S&P 500 and W5000.  
      • When checked, the # of shares in each has increased – and a new 2016 distribution date appeared under the “Quote” tab on M*.  There was a small change in the value of the investments.
    • Rightly or wrongly, this time my goal shifted from seeking dividends to avoiding buying (likely inflated) “ex-dividend” shares prior to the distribution – and the dividend-deflated NAV.

      • Have I been wrong on this?  Help getting a handle on this would be much appreciated, DMx!

      Submitted by David Mertz on Sat, 2016-12-17 19:19

      • I’m not sure if there is a general rule as to where to find the Record Date, Ex Dividend Date and Pay Date, but all three of the investment companies providing the mutual funds that I own publish their estimated year-end distributions and include these dates on a per-fund basis.  If you can’t find the information by searching the web, contact the investment company.
      • I believe that the Distribution Date *is* the Ex Dividend date.  My statements all show the dividend as having been received and reinvested on the Ex Dividend date.  However, the reinvested shares are apparently not posted to my account until the Pay Date even though they seem appear in my online balance overnight following the Ex Dividend Date.  It’s a bit tough to follow.  For example, I have two funds with a Record Date of 12/15/2016, an Ex Dividend Date of 12/16/2016 and a Pay Date of 12/19/2016.  I owned these funds on 12/15 so I received a distribution on 12/16 which was reinvested on 12/16.  The shares are said to post to my account on 12/19.  My online account balance shortly after market close yesterday was reduced due to the drop in NAV resulting from the distribution, before the shares from reinvesting the distribution appeared in my account.  Sometime later overnight last night the shares appeared in my account balance, bringing the balance back to actual.  These activities are all completed after market close on the Ex Dividend Date and before Market close on the Pay Date (the following business day).  Had I originally purchased these funds yesterday on the Ex Dividend Date rather than on or before the Record Date (the day before the Ex Dividend Date), the purchased simply would have been at the lower NAV at the close of the Ex Dividend Date and I would not have received the distribution.  The resulting number of shares would be the same either way.
      • The NAV on the Ex Dividend Date reflect the share value after the distribution.  Consider a fund that has no changes in NAV other than due to the distribution.  A share that has a NAV of $100 the Record Date the day before the Ex Dividend Date and distributes $10 per share on the Ex Dividend Date will have a NAV on the Ex Dividend Date of $90.  Anyone owning 1 share on the Record Date will receive a reinvestment of 0.11111 shares, bringing their share balance to 1.11111 shares with a total value of $100.  Anyone purchasing $100 worth of the stock at on the Ex Dividend Date will also have 1.11111 shares at $90/share.
      • Since you don’t pay taxes on the value until distribution from the qualified retirement account, it doesn’t matter whether you purchase the mutual fund shares before, on or after the Ex Dividend Date.  Still, just so that my intent are more clear, I try to avoid changing investments on the Record Date or Ex Dividend Date (probably Pay Date as well).

      Submitted by Ron Smith on Sun, 2016-12-18 01:50

      DMx, I am with you on your last statement: “….I try to avoid changing investments on the Record Date or Ex Dividend Date (probably Pay Date as well).”  According to this link, there are four dates: Declaration, Date of Record, Ex-Dividend Date, and Payment Date.  At this point, not knowing the Date of Record or Ex-Dividend Date, I plan to also purchase after the Payment Date.  I have much to learn about this.  Much obliged!

      Submitted by Alan - IRA critic on Fri, 2016-12-16 19:36

      There could still be a QCD benefit even if you cannot offset your RMD. If you are going to donate regardless, the QCD will totally exclude the IRA distribution from your AGI. Itemizing would only come close if you had enough deductions to at least match your standard deduction prior to the current donation. And even if you itemized it completely, your AGI would still be higher and that could reduce other tax benefits. However, it does make more sense at this late date to push your donation to January where you can do a 2017 QCD offsetting your RMD income to the extent of the QCD. And if you pledged to donate a certain amount in 2016, most charities would not have a problem if you carried over the 2016 donation and doubled up in 2017.

      Submitted by Ron Smith on Sun, 2016-12-18 01:57

      1. TY, Alan, for outlining the possible tax impact of a 2016 QCD options from the new IRA.  The rollover was driven more by QCD options starting next year, than then this year – tho, I did not know a 2016 QCD would be a possibility in a Traditional IRA that had been funded only during the last 1/2 of Dec 2016.  
      2. Btw, your brief post about the dividend impact on value (linked earlier) was the most clear and concise explanation I have seen – most helpful! 

       

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