Many workers have the option to remove their money from potentially high-cost workplace retirement plans before retirement.
In my last blog I noted the differences in workplace retirement plans rules. This piece covers how to free your retirement money from a SIMPLE IRA. Savers who have SIMPLE IRAs as a workplace retirement savings account have an option to rollover their account balances to an individually managed IRA during their working years; you do not have to wait until retirement or termination from service like many workplace plans. The benefits of rolling out of a high-cost and captive plan to an IRA where you can manage your money on your own may be extremely valuable down the road.
The major consideration if this is a sound strategy (since it almost always will be) is the two-year rule. You will want to wait for two-years from the date your employer first placed contributions into your SIMPLE IRA with them prior to moving the money out. Otherwise, you face an early distribution penalty of 25% of the distributed amount. After two years, you are free to rollover all money, whenever it has been contributed, as often as you like. It is preferable to do this via a trustee-to-trustee transfer to an IRA rather than a rollover.
Also important to consider is if you are paying commissions on your SIMPLE IRA plan contributions to a broker through mutual funds that charge a front-load (A shares) or deferred sales charges (C shares). Consider the costs and penalties for making withdrawals. Typically a C share will have a 1% penalty to move money within the first year, and an A share may have a short-term trading fee or other fee. Find out if there are fund options with low commissions, or a money market option without a contingent deferred sales charge or front-end load.
Don’t believe that because you aren’t seeing commissions or costs that you have a low-cost plan, as many mutual funds have explicit and other expenses of 2-3% or greater. Consider that after 30 years two otherwise identical portfolios earning 6.5% before fees, the portfolio with 1% additional annual costs results in a 25% lower retirement account balance. A $1 million beginning portfolio (with no contributions) with total costs (fund expenses, advisory fees, etc.) of 1% would end the 30 years at nearly $5 million, while a 2% cost portfolio ended at $3.7 million.
It’s important to note that in order to earn a high rate of return, you must invest, which means there will be costs. But, many SIMPLE IRA participants pay a broker 1% or more, and have high cost selections, and they receive no benefits from paying that cost.
The preceding blog was originally published by Forbes. To view the original blog please visit our blog at Forbes. http://www.forbes.com/sites/feeonlyplanner/