The “Best” IRA Rollover Offers Are Not What They Appear
Before you bite on one of the “best” IRA rollover offers, it's important to read the fine print and ask yourself a few questions.
Incentives are designed to get you in the door—but once you are there, fees can pile up.
Make sure you read the fine print and do the math.
What are their fees—and are they hidden?
Money managers don’t offer cash bonuses out of generosity. Often, managers that offer the largest cash bonuses can only afford to do so because it also charges the highest fees. Within a few months, a company will have recouped the entire bonus, but its fees stay sky high.
Our recommendation? Do a little math on how much you’ll be paying per year to keep your money with a manager before you take them up on the cash bonus. You’ll likely find that the bonus is a drop in the bucket when compared to the fees you’ll be paying over the five, 10, or even 30 years until retirement.
Additionally, the advertised fees are not always the only ones, and any hidden fees tend to be buried. It’s better to learn about them before you commit than to be surprised later.
Account closure fees, in particular, are a mainstay in brokerage fine print. You might as well deduct the account closure fee from the cash bonus, as that portion of the bonus is really only a loan from the provider that you’ll have to repay if you decide to leave.
2015 IRA Offer Case Study: Merrill Edge
Let’s say you were considering a rollover for your $20,000 IRA and wanted to take Merrill Edge up on its 2015 (the company changes its offers periodically, but you can see their standard cash current offer page here): $100 cash bonus, plus 300 free trades. Merrill’s offer is a typical example of one from a big brokerage.
|Merrill’s Offer||What You Actually Received|
|$100 Bonus||Your take-home bonus is actually only $50 after Merrill’s $50 account closing fee.|
|300 free trades||You won’t use all of these trades, as you only have 90 days to use them, according to the fine print.1 (Most reasonable investors make less than 300 trades over three months.)|
|$6.95 per trade after 90 days||You could end up paying $312 in your first year alone. While the first three months are free, the next nine aren’t. We assume that in order to reinvest your returns as they come on, and keep your portfolio balanced, you make five trades per month.2 Even if you trade less, you can see how quickly the bonus evaporates.|
Net of your cash bonus and free trades, you’ll still pay Merrill more than $260, or about 1.3% of your balance, in your first year as a customer. It gets worse from there. In Year 2, without the benefit of the bonus and with commission on every trade, that fee would increase to roughly 2% of your original balance, depending on market changes. Compare that with a Betterment account, which would charge you almost 90% less—0.25% per year.
Do I really want this company to manage my money?
So, you’ve done the math and know exactly how much you’ll be paying in fees relative to the bonus they’re offering. Ultimately, however, the cost of the product is only one of several considerations when choosing a provider.
You should ask yourself these questions before choosing a provider, even if the offer looks like it’s the best one out there.
- Does the provider offer an adequate level of guidance for your savings?
- Are you confident that your money is working as hard as it could be?
- How is the company’s customer service and website?
Why Betterment Is Different
Before any bonuses, Betterment costs you much less. We typically offer one to 12 months of our service as a free trial, depending on when you sign up, the offer you use, and how much you deposit. If you don’t like our service, you can always move it to another brokerage or wealth manager at the end of your trial, free of charge.3
But we think you’ll stay. Not only are our fees low, but we offer a superior investment experience—starting with personalized allocation advice for your money, a diversified portfolio of ETFs, and automated portfolio management—all of which is included in our low fee. No extra fees or hidden costs.
For a $20,000 account at Merrill, the trading you would need to keep your funds invested and balanced would cost you roughly 2% of your balance in the second year. At Betterment, on the other hand, you would pay only 0.25%, for a savings of $350 for the year. Even as your account grows, the annual savings would remain significant.4
1 From Merrill Edge’s original 2015 disclosure: “$0 trades begin within 5 business days of account opening and must be used within 90 calendar days; up to 300 trades per account. $0 trades are only applicable in the new account and are limited to online equity and ETF trades. Standard commission rates apply to trades in excess of the 300-trade limit or after 90 days.”
2 This is a very conservative estimate of how many trades Betterment performs for a customer. If the customer makes ongoing contributions, in addition to needing dividends reinvested, the number is significantly higher.
3 Betterment has no fees for closing an account. If you move investments outside of a rollover you will be responsible for any resulting tax liabilities.
4We’ve updated our pricing structure since this article was published. Learn more at betterment.com/pricing.
When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. The information on this page is being provided for general informational purposes and is not intended to be an individualized recommendation that you take any particular action.
Factors that you should consider in evaluating a potential rollover include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account and consult tax and other advisors with any questions about your personal situation.
More from Betterment:
Roth IRA Rules: Smart Ways to Minimize Taxes on a Conversion
Roth IRA rules can appear limiting on first glance—but you may be able to fund a Roth by rolling over funds from another account.
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We set out to make investing more efficient—and we have. With our platform, your investor returns can get a boost of 2.66%.
Smart Saver and Other Savings Products: Our Recommendations
We know from talking to Betterment customers that holding cash isn’t always intentional; it’s a choice by default—not knowing how, when, or why to put your money to work. We developed Smart Saver to help with that.
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