The most expensive month of your financial life
The month you retire, a lifetime of savings becomes movable for the first time. If you are also about to leave the country, the move happens in a hurry, on the advice of whoever is nearest, and with the vague sense that everything must be “set up” before departure. The retail brokerage industry organizes around that month. Rollover money is the most profitable money it handles, and the products sold with it — variable annuities, proprietary managed accounts, non-traded REITs — pay the seller in proportion to how poorly they fit a retiree who needs income and access.
This checklist exists so that you go through the month slowly. None of it requires a lawyer. All of it produces the paper trail that a lawyer would need if the recommendation turns out to have been the problem.
First: you do not have to roll over
Leaving the money in the employer plan is a legitimate option, and for many people the best one. Plan investments are often institutionally priced, the plan has a fiduciary responsible for the lineup, distributions can be taken from most plans in retirement, and a plan is not a brokerage that can decide it no longer serves residents of your country. The only common obstacle is a small-balance force-out — balances below a threshold (a few thousand dollars; check your plan) can be moved out without your consent. Above that, ask the plan administrator, in writing, whether you can stay as a non-resident and how distributions are paid abroad.
Ask the same question of any broker or advisor who recommends the rollover: “Why is this better than leaving it in the plan?” Since June 30, 2020, Regulation Best Interest has required a broker who recommends a rollover to have a reasonable basis for it after considering the alternatives — including staying put — and the fees, services, investment options, and protections of each. An advisor who cannot answer the question in writing has not done that.
The questions to ask, in writing, before any rollover
Email these to whoever is recommending the rollover and keep the answers. If the answers do not come in writing, that is an answer.
- What are the total annual costs of what you are recommending — advisory fee, fund expenses, insurance charges, everything — compared with what I pay in the plan now?
- What are you and your firm paid if I do this, and how?
- Is any product you are recommending subject to a surrender charge, lockup, or limited redemption? For how long, and what does it cost to leave?
- Will the firm that holds the IRA keep it if my residential address is in [country]? Please send the policy.
- What happens to this recommendation if I stay in the plan instead?
The annuity-inside-an-IRA problem
An IRA is already tax-deferred. A variable or indexed annuity’s principal selling point is tax deferral. Putting one inside the other buys a feature you already own, in exchange for annual fees that commonly run 2 to 3.5 percent and a surrender schedule of seven to ten years. Firms are expected to document why the insurance features — a death benefit, an income rider — justified the cost for the specific customer. For a retiree moving abroad who may need to relocate the account, or the money, within a few years, that justification is hard to write. If someone is proposing an annuity for your rollover, ask for the surrender schedule and the total annual charges in writing, and ask what the same insurance feature would cost purchased separately.
The other rollover products to look at twice
Not every one of these is wrong for every person. Each is sold far more often than it fits:
- A managed or “wrap” account with an advisory fee on top of the fund expenses inside it — ask for both numbers and add them
- Proprietary funds — the firm’s own brand, which may not transfer if you later need to move the account
- Non-traded REITs, private placements, and other alternatives with no market — a retiree who needs access should not hold much, or any, of these
- Structured notes described as “principal protected” — read the term sheet for what protection actually means and who guarantees it
- Anything recommended as the solution to your move abroad without a comparison to simply transferring the account
The mechanics: direct rollover, real address, documents saved
If you do roll over, do it as a direct rollover — plan to IRA custodian, no check payable to you. Open the IRA under your real residential address at a custodian that has confirmed, in writing, that it will keep a US citizen resident in your country; a borrowed US address is a misstatement that the firm can use to close the account later on its own terms. Save the plan statement before the rollover, the rollover election form, the IRA application, the risk questionnaire, and every recommendation in writing.
One caution that applies to every paragraph here: we are securities litigators, not tax advisors. Anything involving your US return, the foreign earned income exclusion, or how a sale is taxed belongs with a CPA who handles expats.
If the rollover already happened
If you are reading this after the fact — the rollover was done in a rush, the money went into an annuity or a fee-heavy managed account or something you cannot sell, and no one compared it to staying in the plan — the rollover recommendation itself is subject to a best-interest standard, and the products bought with it to FINRA Rule 2111. The paperwork you saved (or can request) is the case. The review is free and confidential, and it is done from wherever you now live.
Key takeaways
If you remember six things
- Staying in the employer plan is a legitimate option; a rollover must be justified against it.
- Regulation Best Interest requires a broker recommending a rollover to consider the alternatives and costs.
- Ask five questions in writing — total costs, compensation, lockups, the custodian’s non-resident policy, and “why not stay?”
- An annuity inside an IRA buys tax deferral you already have, at the cost of fees and a surrender schedule.
- Do a direct rollover, under your real address, at a custodian that has confirmed its policy in writing.
- If it already went wrong, the rollover paperwork is the case, and the review is free from anywhere.
Questions
Asked most often
Is it ever right to roll a 401(k) into an IRA before moving abroad?
Sometimes — when the IRA is cheaper, offers investments you need, or the plan will not accommodate a non-resident. The point is that the comparison must actually be made and documented, not assumed.
What about my TSP or a government pension?
The same principles apply: a rollover out of a low-cost plan needs a reason, and the recommendation to make it is subject to a best-interest standard. Distribution rules and tax treatment for those plans are questions for the plan and an expat CPA.
The advisor was a friend from church and did not charge me a fee. Does that matter?
If the advisor was registered with a brokerage or advisory firm, the recommendation is subject to the same rules regardless of friendship, and the products almost certainly paid a commission. If the advisor was not registered anywhere, the question is different, and we will tell you which it is.