In 2010 the IRA Rollover market was approximately $525 billion. About 40-45% percent of the IRA Rollovers are due to retirement while 30-35% percent are due to individuals leaving changing jobs. The remainder are driven by a variety of issues (e.g., people dealing with a balance left in a previous employer’s plan, medical hardship, etc.) What should investors know before they choose to rollover their IRA?
0. Many plans do not require you to roll the assets out of the plan. You can choose to leave it invested just as it currently is invested. This is not true for every plan or every situation, but it is something you should ask about. Ask your plan sponsor whether the assets can remain in the plan. Depending on the size of your account or the reason for your departure (retirement vs. leaving the company), the plan may have different rules. But if you are unsure of what you want to do with the assets, see if you can wait until you are ready to make a decision. While you will no longer be making contributions or receiving a match, your account will be invested exactly as it is during your departure. It used to be that plan sponsors wanted non-participants out of the plan as soon as possible, but today, depending upon its fee arrangements with the provider, sometimes retaining the assets in the plan is beneficial to the plan sponsor as well as the participant.
1. Some providers will assist you in rolling assets into an account at their institution. While this makes you feel comfortable that the proper paperwork and other issues are covered, you need to make sure that you are comfortable with this institution and that you are not in any way paying a premium for these services.
2. Overall, 60-65% percent of investors use an advisor to assist them in an IRA Rollover decision. If you already have a relationship with a financial advisor of some type, you may want to discuss the potential rollover with this individual. While he or she will undoubtedly want to manage those assets, make your own decision about whether you should consolidate assets with one advisor or consider another arrangement.
3. Make sure you understand how other household assets are currently invested, including your spouse's retirement accounts. It is always wise to consider your overall household portfolio allocation when making a decision about your IRA account. Should these assets represent the conservative portion of your total household portfolio or do you want to invest these assets among multiple ranges of risk tolerance as you would an entirely separate portfolio?
4. Be aware of the fees you are paying. Generally organizations waive their IRA account fee and charge based upon a percentage of the assets. Be sure to ask how the fees are disclosed and exactly where they are located on your statement. The type of account that holds the assets will charge differently. For example, if you are directing your own investments you may have placed the funds into an online account. Make sure you look for account fees as well as transaction fees. Will you be charged each time you make a trade? Find out the answers to these questions before choosing a provider for the account.
5. You need to have the organization from which you are withdrawing funds send an ACH or a wire to the new organization. This means that you actually have to set up the account and have the information available when you contact the plan provider to initiate the transaction.
6. You can choose to have the assets sent to your own bank account but you need to ensure that the same dollar amount of assets are deposited into a new account within 60 days of the date you received the assets. You must have a clear trail regarding the assets for two primary reasons: the new IRA provider will want to ensure that they are assets from a "qualified employee benefit plan" and secondly, you will need to prove the validity and timeliness of the transactions if the IRS should ever audit your records.
7. Attend seminars or watch webinars that your employer may offer. There is always good advice offered that may assist you in making an informed decision. A significant number of investors attend seminars years before actually making an IRA rollover decision. They retain the information and use it when they are ready to make a change.
8. Identify the primary role of your IRA account. Will this account be primarily a savings account that will only be used when necessary? If so, make sure you familiarize yourself with the distribution requirements when you turn 70 1/2 to avoid tax penalties. Or is it a primary income source in which you will take regular distributions during retirement? If so, perhaps you should work with an advisor to formulate an income plan that will last throughout your lifetime.
IRA accounts will be a primary source of retirement income in the future. For many, it will not be adequate to meet all of their financial needs. Understanding how an IRA fits into your overall planning is key to long term success.