401k, IRAs, ROLLOVERs & FEEs ? Ask Karen Chan

Q:

We moved to a different state and I rolled my 401K into an IRA with my bank, but I don?t know what to do next. I?m worried if I invest with the bank, their fees wil eat up any money my investment makes. What do you recommend?

A:

You?re wise to pay attention to costs associated with your IRA. Annual costs ? reflected in the annual expense ratio ? are, according to Morningstar, ?the most dependable predictor of performance? for mutual funds.? For a good overview of the types of fees you might encounter, read Mutual Fund Fees and Expenses from the SEC (Securities and Exchange Commission).

Annual expense ratios for mutual funds average about 1.5% per year, or higher for certain types of funds such as emerging markets funds. Index funds, on the other hand, may be as low as 0.1%. In addition, you may pay a load or commission (typically between 3.5% and 8.5%) when you buy or sell. There may also be account maintenance fees, especially if the balance is small. A relative of mine worked with a ?friend? to set up an IRA a few years ago. The $2000 contribution was split among 4 or 5 different mutual funds, and each one carried an annual account maintenance fee .

When you rolled your 401(k) to your bank, did you put it in an insured bank account (CD, money market account, etc.)? Or did you open an investment account with a broker that is housed at the bank? Either one can be an IRA. If you have an investment account, you may have already incurred sales charges on those investments. Or, you might owe deferred sales charges if you sell before a certain number of years.? Also check with your bank (or broker) to see if they will impose charges for closing the account.

According to IR S Publication 590, p. 26: ?The once-a-year limit on IRA-to-IRA rollovers does not apply to eligible rollover distributions from an employer plan. ?,? so there is no legal barrier to your moving the money once again, to another custodian. See my reply to ?401k & ROLLOVER? for more about moving money to a new custodian.

If you need help selecting investments and navigating this process, learn about the different kinds of financial professionals, how they are paid, and how to select one on my website, Choosing a Financial Professional.

Source: http://schaumburglibrary.org/ask-karen-chan/2011/08/29/401k-iras-rollovers-fees/

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