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Why does Vanguard take over one day to convert after-tax 401(k) to 401(k) Roth within one's plan? Why isn't it faster, or even immediate? For example, if one initiate the conversion on Saturday noon PT, the conversion will take place on Monday evening PT.

Among other things, I wonder whether the delay results from some regulations.

The motivation behind converting after-tax 401(k) to 401(k) Roth faster is to avoid tax on earnings (What are the pros and cons of converting an after-tax 401(k) to a Roth 401(k)?).

  • There are plenty of questions and answers on this site that describe exactly what happens when one buys or sells shares in a traditional mutual fund. In particular, all orders are executed at the end of the business day, and so your "initiation" of the conversion over the weekend does not actually get executed until Monday evening. – Dilip Sarwate May 19 '18 at 23:12
  • @DilipSarwate 1) Does converting after-tax 401(k) to 401(k) Roth within one's plan require the investment firm to buy/resell the content of the 401(k)? 2) What if the 401(k) contains non-mutual funds, e.g. individual stocks? – Franck Dernoncourt May 19 '18 at 23:36
  • From "Saturday noon" until "Monday evening" is less than one (business) day. Saturdays and Sundays don't count (offices are closed, markets are closed). It's not that the market is necessary to do the paperwork, it's that companies don't hire people to work at times when most business can't be conducted. – Ben Voigt May 20 '18 at 0:37
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    @BenVoigt "From "Saturday noon" until "Monday evening" is less than one (business) day." -> It's exactly one business day. – Franck Dernoncourt May 20 '18 at 0:38
  • @BenVoigt " It's not that the market is necessary to do the paperwork, it's that companies don't hire people to work at times when most business can't be conducted." -> Is there any human process to perform the after-tax 401(k) to 401(k) Roth conversion? – Franck Dernoncourt May 20 '18 at 0:39
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The conversion you are trying to do does not require a sell-and-rebuy transaction, but it requires to record the exact value of the portfolio at the moment of transfer for the IRS. As the value gets only determined once a day, for that point in time, the conversion can only happens at this point of time, and the value gets recorded with the calculated data from this moment.

If you transfer cash equivalents, obviously, that is not needed, as the value is known exactly, and the amount is immediately available in the target account.

In addition, if the money comes from an outside account, there is a delay of several daysbefore it settles, as they need to wait out the verification of the transfer from the source. You can still buy and sell shares with the amounts, but you cannot do a tax relevant conversion until the money is confirmed.

  • Thanks. "As the value gets only determined once a day" -> is that also true if the 401(k) contains non-mutual funds, e.g. individual stocks? – Franck Dernoncourt May 26 '18 at 17:21
  • I don't know for stocks, sorry. – Aganju May 26 '18 at 17:33
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From Investopedia:

https://www.investopedia.com/ask/answers/110615/when-are-mutual-fund-orders-executed.asp

Trading and Settlement Mutual fund shares are highly liquid. They can be bought or sold (redeemed) on any day when the markets are open. Whether working through a representative (e.g. an advisor) or directly through the fund company, an order can be placed to buy or redeem shares, and it will be executed at the next available net asset value (NAV), which is calculated after market close each trading day. Some brokerages and fund companies require orders be placed earlier than the market close (2 p.m. Eastern Time), while others allow same-day execution right up to the market close.

The settlement period for mutual-fund transactions varies from one to three days, depending on the type of fund.

I expect that if you look at your Terms and Conditions for a traditional mutual fund or retirement custodial account you'll see that orders are processed at the end of the business day. So placing an order on Saturday means you'll get end of day Monday price.

As for why it takes at least one business day to execute: Internally at banks and brokerages most of types of transactions are done via 'batch' overnight - a hold over from the mainframe days. Having a bit of time margin from the last exchange trade allow for slow/correction reporting. Beyond overnight I think its a regulatory issue.

  • Thanks, does converting after-tax 401(k) to 401(k) Roth within one's plan require the investment firm to buy/resell the content of the 401(k)? 2) What if the 401(k) contains non-mutual funds, e.g. individual stocks? – Franck Dernoncourt May 20 '18 at 1:22
  • If it isn't a regular brokerage account and you aren't doing only a trade on a exchange, I would expect (hope) that the valuation taken would be at the end of business day of the transactional request. Remember the type of account supersedes what you think is a trade. If you wanted to lock in values, say in a declining market, you could have sold the stock in your original retirement brokerage account and taken the trade commission expense and then some time afterward (same day? T+2?) initiate a conversion. By now I would have spoken with a Vanguard representative to confirm the behavior. – Morrison Chang May 20 '18 at 1:32
  • Thanks, does converting after-tax 401(k) to 401(k) Roth within one's plan require the investment firm to buy/resell the content of the 401(k)? – Franck Dernoncourt May 20 '18 at 3:58
  • Each account type is its own entity so honestly, I'm inclined to think that it is more uniform to just only accept cash so the process would be the same from any source, internal or external, as well as consistent from a IRS reporting perspective (i.e. what happens when the source is restricted stock or a convertible bond, cash is easier to deal with). – Morrison Chang May 20 '18 at 5:12
  • @FranckDernoncourt: Even if they can transfer ownership of the shares between the accounts without selling or buying, they have to value them, and the only time the shares' value is known is during the daily batch processing. It appears Aganju wrote an entire answer explaining this. – Ben Voigt May 20 '18 at 21:14

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