The IRA Rollover: Making A Sound Decision

Physician Wealth Advisors |

The largest source of IRA contributions comes from individuals who move their money from their employer-sponsored retirement plans such as 401(k) and 403(b) plans when they leave a job, according to the Employee Benefit Research Institute.

If you are considering rolling over money from an employer plan into an IRA—or if you have been in contact with a financial professional to do so—follow these tips to decide whether an IRA rollover is right for you.

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 the company's policy). If allowed, you can transfer assets to your new employer's plan (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. 
Each has pros and cons but cashing out your account is rarely a good idea for younger individuals. If you are under age 59½, the IRS generally will consider your payout an early distribution, meaning you could owe a 10 percent early withdrawal penalty on top of federal and applicable state and local taxes.

With a direct rollover, you instruct your former employer to send your 401(k) assets directly to your new employer's plan or 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. You will not get the full amount because the plan must withhold 20 percent to ensure that taxes will be paid if the rollover is not completed. You must deposit the funds in an IRA within 60 days to avoid taxes on pretax contributions and earnings—and to avoid the potential of an additional 10 percent tax penalty if you are younger than 59½. If you want to defer taxes on the full amount you cashed out, you will have to add funds from another source equal to the 20 percent withheld by the plan administrator (you get the 20 percent back if you properly complete the rollover).

If you leave your job between the ages of 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 traditional employer plans and traditional IRAs require the periodic withdrawal of specific minimum amounts, known as the required minimum distribution (RMD). 

Both employer-sponsored plans and IRAs involve investment-related expenses and plan or account fees. Investment-related expenses can include sales loads, commissions, the expenses of any mutual funds in which assets are invested, and investment advisory fees. Plan fees can include administrative costs (recordkeeping and compliance fees, for instance) and fees for services, such as access to a customer service representative. Sometimes, employers pay for some or all of the plan's administrative expenses. IRA account fees can include administrative, account set-up and custodial fees, among others. Before making a rollover decision, know how much you currently pay for your plan.

Compare that to the fees and expenses of a new plan or IRA. For more information about 401(k) fees, see the Department of Labor's publication, A Look at 401(k) Plan Fees. For IRA fees, ask your financial professional to provide you with information about fees and expenses and read your account agreement and any investment prospectuses.

An IRA often enables you to select from a broader range of investment options than an employer plan but might not offer the same options your employer plan does. Whether the IRA options are attractive will depend, in part, on how satisfied you are with the options offered by your current or new employer's plan. Some employer plans also provide access to investment advice, planning tools, telephone help lines, educational materials, and workshops. Similarly, IRA providers offer different service levels, including full brokerage service, investment advice, and distribution planning. If you are considering a self-directed IRA, consider the tradeoffs.

Financial professionals who recommend an IRA rollover might earn commissions or other fees as a result. In contrast, leaving assets in your old employer's plan or rolling the assets to a plan sponsored by your new employer likely results in little or no compensation for a financial professional. In short, even if the recommendation is sound, any financial professional who recommends you move money from an employer-sponsored retirement plan into an IRA could benefit financially from that move.

At UMA Financial Services, when we provide investment advice regarding your Plan account or IRA, we are fiduciaries within the meaning of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA") and/or the Internal Revenue Code as applicable, which are laws governing retirement accounts. Our provision of fiduciary advice regarding rollover transactions also requires that we comply with Prohibited Transaction Exemptions ("PTE") 2020-02, promulgated by the United States Department of Labor ("DOL"). Under this rule's provisions, we must:

  • Meet a professional standard of care when making investment recommendations (give prudent advice).
  • Never put our financial interests ahead of yours when making recommendations (give loyal advice).
  • Avoid misleading statements about conflicts of interest, fees, and investments.
  • Follow policies and procedures designed to ensure that we give advice that is in your best interests.
  • Charge no more than a reasonable fee for our services, and
  • Give you basic information about conflicts of interest.

Competition among financial firms for IRA business is intense, and advertising about rollovers and IRA-related services is typical. In some cases, the advertising can be misleading. FINRA has observed overly broad language in advertisements and other sales material that implies no fees are charged to investors with accounts held at those firms. Even if there are no costs associated with a rollover, there will undoubtedly be costs related to account administration, investment management, or both. Don't roll over your retirement funds solely based on the word "free."

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 selling securities in your plan or purchasing 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. If in doubt, remember that UMA Financial Services (UMAFS), a wholly-owned subsidiary of the Utah Medical Association (UMA), was created almost thirty years ago as a reliable resource for medical professionals to receive a sound and unbiased second opinion that can lead to superior financial outcomes.

Questions? Contact our UMAFS team today at or 801-747-0800 for an expert second opinion.