Securities Regulation Daily Wrap Up, INVESTOR EDUCATION—FINRA issues investor alert on IRA rollovers, (Jan 23, 2014)

By Amy Leisinger, J.D.

The Financial Industry Regulatory Authority (FINRA) has issued a new investor alert to assist investors in determining whether an IRA rollover is an appropriate decision in light of individualized circumstances. In “The IRA Rollover: 10 Tips to Making a Sound Decision,” FINRA provides practical advice for those considering a rollover, including information regarding tax minimization, fees and expenses, and potential conflicts of interest. Rollovers typically involve significant funds, according to FINRA, and each investor should take care to consider a variety of investment options and age restrictions before making a final determination.

In a press release issued in connection with the alert, FINRA's senior vice president for Investor Education, Gerri Walsh, told investors, "[t]aking the time to compare costs and investment options can help you keep your nest egg from suffering unnecessary cracks."

Evaluating options. The alert notes that, in considering an IRA rollover, there are generally four options: (1) keeping some or all of the funds in a former employer's plan; (2) transferring assets to a new employer’s plan; (3) cashing out the account balance; and (4) rolling plan assets into an IRA. Cashing out is rarely a good idea, according to FINRA; individuals under a certain age may owe a substantial withdrawal penalty in additional to potential federal and state taxes.

Tax consequences. If an individual decides to roll over retirement plan assets to an IRA, FINRA stated, the investor should then review the tax implications of the move. No taxes are due if assets are rolled over from a traditional plan to a traditional IRA, or a Roth plan to a Roth IRA, but taxes may apply if funds are moved from a traditional plan to a Roth IRA. According to the alert, an individual with a retirement plan featuring company securities may face income taxes on a distribution of securities that have increased in value, and an indirect rollover (a lump-sum distribution followed by a later transfer) has significant tax consequences. As such, FINRA recommends that investors consult with plan administrators, financial advisors, and tax professionals about potential tax implications of an option before making a decision.

Fees and expenses. The alert also cautioned investors to be wary of claims regarding “free” or “no fee” services. Some providers use overly broad language in sales material that implies that no fees charged, but, as FINRA notes, there will “almost certainly” be administration and management costs. Both employer-sponsored plans and IRAs involve investment-related expenses, and plan or account fees, and before making a rollover decision, investors should know how much they are currently paying and compare it to the costs associated with the new plan, according to FINRA. Moreover, a financial professional recommending an IRA rollover might earn a commission or fee as a result, and investors should consider how the advisor may benefit from a given investment decision, the alert notes.

RegulatoryActivity: FINRANews InvestorEducation