Be Careful With IRA Rollovers

Be Careful With IRA RolloversMan protecting his savings


Research plays a huge role in your art. Whether you’re exploring the motivation for a character you’re about to play, scouring the net for new textures and ideas for a painting, or digging into the history of any revolution for your next book, research is at the base of most artistic pursuits.

It’s the same with your financial decisions.

I mention this because while doing research, I noticed that FINRA, the board who overseas most financial professionals, was going to focus more on retirement plan rollovers. It seems they’re worried that too many people might be making poor decisions in this area.

So, to help you with your research, I thought today we’d discuss what a “rollover” is, how it should work, and what FINRA might be worried about.

What is a “rollover”?

If you worked in the United States and have a retirement plan, such as a 401k, 403b or 457 plan, a “rollover” is the law that allows you to move the money inside this plan to an IRA without paying taxes immediately. Instead, you’ll still avoid taxes until you take the money out of the shelter.

Why would someone do a rollover?

A rollover allows you to be more flexible with your money. Instead of only relying on your old employer’s plan options for investments, you can now pick from a wide variety of instruments that you choose on your own, or with the help of an advisor.

In most cases, moving your money to an IRA allows you more freedom. Much like most artists avoid being confined, your money has the opportunity to perform better when you widen the boundaries. While most 401k plans only have several mutual funds, you may invest an IRA in anything from CDs to exchange traded funds, to individual stocks or bonds….not to mention those same mutual funds you had available in your 401k plan.

Why would someone decide NOT to perform a rollover?

There are very few reasons NOT to roll your money over to an IRA. First, if you worked for a company whose stock has soared and you held some in your 401k, a rollover IRA might be a horrible idea (check with an accountant on better strategies). Also, if you’ve left the service of your company between 55 and 59 1/2 years old, a 401k plan gives you more flexibility. Otherwise, an IRA is usually the best tool to use.

Should I Talk To An Advisor About an IRA Rollover?

Here’s the part where FINRA is worried. Some advisors have been making unsuitable recommendations for IRA rollovers. Here are a few:

  • They recommend an annuity inside your IRA. Annuities do have some attractive, but expensive options that can guarantee your money. However, annuities themselves are tax sheltered investments. So, a tax-sheltered annuity inside of an IRA tax shelter makes little sense. Because annuities often pay huge commissions to the agent, some unscrupulous agents are happy to sell you one. When to use an annuity in an IRA: you want to invest in the financial markets but also want some guarantees your money will be around. When NOT to use an annuity: An agent or advisor tells you that it’s just a grouping of mutual funds. You can buy these funds FAR cheaper outside of an annuity.
  • They advise you to buy stocks that they’ll manage in a “discretionary account. This practice is going away quickly, but some advisors like to trade stocks often to earn commissions. This practice is called “churning” and should be avoided. When to use a “discretionary account: you have a TON of money and want to invest some with a manager who you feel has a good track record. When NOT to use a “discretionary account: every time except the one listed above.
  •  They want to sell you a series of mutual funds with front or back end fees. These funds are called “load” funds, and garner a big commission for the advisor (if it’s a front end fee it can be as high as 8%!). When to use load funds: You have a trusted advisor and want to make sure he gets paid. When not to use load funds: If you have little relationship with an advisor and want to avoid high up-front or internal costs in your investments. 

There are other ways FINRA worries that advisors might not have your best interest at heart when advising you to roll over money to an IRA, but these are the biggies. If you feel like you’re being pressured by an advisor, seek a second opinion. If you aren’t sure if the recommendations an advisor is making are suitable, do what you’d do in your art: jump online and research. You’ll feel stronger as you learn more about how your money works.