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10 Tips for a Successful Rollover: FINRA

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After warning firms that reviewing their qualified plan rollover practices will be an examination priority this year, the Financial Industry Regulatory Authority on Thursday released an Investor Alert detailing 10 steps investors should take to decide if an IRA rollover is right for them.

In releasing The IRA Rollover: 10 Tips to Making a Sound Decision, Gerri Walsh, FINRA’s senior vice president for investor education, notes that “workers and retirees should understand that in many cases they don’t have to act immediately [regarding plan rollovers] upon switching jobs or retiring.” Take the time to first “compare costs and investment options can help you keep your nest egg from suffering unnecessary cracks.”

FINRA said in releasing its exam priorities in early January that staff will also examine firms’ marketing materials and supervision regarding rollovers, as well as evaluate securities recommendations made in rollover scenarios to determine whether they comply with suitability standards in FINRA Rule 2111.

The Securities and Exchange Commission will also be setting its sights on IRA rollover practices this year.

FINRA notes recent research by the Employee Benefit Research Institute, which found that the largest source of IRA contributions are from individuals who move their money from their employer-sponsored retirement plans.

FINRA gave investors 10 tips to consider before rolling over an account:

1. Evaluate your transfer options. You generally have four choices. You can usually keep some or all your savings in your former employer’s plan (check with your benefits office to see what the company’s policy is). You can transfer assets to your new employer’s plan, if allowed (again, check with the benefits or human resources office). You can roll over your plan assets into an IRA. Or you can cash out your balance.
2. Minimize taxes by rolling Roth to Roth and traditional to traditional. No taxes are due if you roll over assets from a traditional plan to a traditional IRA, or if you roll over your contributions and earnings from a Roth plan to a Roth IRA.
3. Think twice before you do an indirect rollover. With a direct rollover, you instruct your former employer to send your 401(k) assets directly to your new employer’s plan or to an IRA—and you never have to handle the money yourself. With an indirect rollover, you start by requesting a lump-sum distribution from your plan administrator and then take responsibility for completing the transfer. Indirect rollovers have significant tax consequences.
4. Be wary of “free” or “no fee” claims. Even if there are no costs associated with a rollover itself, there will almost certainly be costs related to account administration, investment management or both. 5. Realize that conflicts of interest exist. Financial professionals who recommend an IRA rollover might earn commissions or other fees as a result.
6. Understand fees and expenses. Both employer-sponsored plans and IRAs involve investment-related expenses and plan or account fees.
7. Compare investment options and other services. An IRA often enables you to select from a broader range of investment options than are available in an employer plan, but might not offer the same options your employer plan does.
8. Engage in a thoughtful discussion with your financial or tax professional. Don’t be shy about raising issues such as tax implications, differences in services, and fees and expenses between retirement savings alternatives. If your financial professional recommends that you sell securities in your plan or purchase securities in a newly opened IRA, ask what makes the recommendation suitable for you. As with any investment, if you don’t understand it, don’t buy it.
9. Age matters. If you leave your job between age 55 and 59½, you may be able to take penalty-free withdrawals from an employer-sponsored plan. In contrast, penalty-free withdrawals generally are not allowed from an IRA until age 59½. Once you reach age 70½, the rules for both traditional employer plans and traditional IRAs require the periodic withdrawal of certain minimum amounts, known as the required minimum distribution (RMD).
10. Assess the tax implications of appreciated company stock. Some retirement plans feature company securities (such as stocks, bonds or debentures) — and, as with earnings on other investments, any increase in their value will typically be subject to ordinary income tax when you withdraw the securities from the plan.

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