If you are changing jobs, planning to retire or about to exit Florida’s Drop Program and have a 401(k) retirement plan at work, you generally have 4 options for that plan.
1. Leave the money in the old 401(k) plan.
2. Move the money to your new companies 401(k) plan
3. Withdraw the money
4. Roll the 401(k) into a IRA in your name
Benefits of Rolling Your 401(k) into an IRA
When you leave your company, what happens to your 401(k)? Depending on a variety of factors, pay out of your 401(k) account balance shortly after your separation from service may be required. You then have the option to roll the account over to an IRA, new employers qualified retirement plan or to take a lump sum distribution. When thinking about these options, consider moving your account into a rollover IRA. Whether retirement is around the corner or many years away, rolling your 401(k) into an IRA offers you a number of benefits listed below:
Postpone paying taxes and penalties.
Taking a lump sum distribution from your company’s 401(k) plan can be very expensive. Taxes are payable at your income tax rate and a 10 percent federal penalty may apply if you are under the age of 59 1/2. Lump sum distributions do provide cash but can be very expensive. A Rollover IRA gives your retirement plan assets the ability to continue to grow tax-deferred. You will also avoid having 20 percent withheld for income taxes, potentially paying income taxes by not taking a cash distribution.
Widen Your Investment Choices
You have more investments to choose from in your own IRA, not just those available to you through your company’s plan.
Extend distributions over the life of your designated beneficiary
Some 401(k) retirement plans severly limit the number of years for the distribution of benefits to a deceased employers beneficiary. As of January 1, 2010 however, all qualified retirement plans are required to offer spousal and non-spousal beneficiaries the opportunity to make a direct rollover of an inherited plan acount balance to an inherited IRA from which strech distributions can occur.
Combine Retirement Assets
Use a rollover IRA to consolidate all your retirement investments into a single account. It can be confusing at times keeping up with paper work from a number of differernt accounts, this eliminates the problem.
While you can no longer contribute to your former employers 401(k), you can make contributions to your Rollover IRA assuming you have an earned income and are under the age of 70 1/2. Contributions of up to $5,000 a year may be possible. If you are age 50 or older, you can contribute an extra $1,000 for a total of $6,000. Should your new employer offer a 401(k) plan, you can contribute to that plan while also contributing to your IRA.
For many investors, investing typically begins with one stock or mutual fund. Over time, other selections are added because many people understand it may not be prudent to invest everything in a single security, even if it has a “blue chip” reputation. However, just “spreading money around” in a haphazard way may create only an illusion of diversification.
If you have assembled a “hodgepodge” portfolio, you may not know the extent to which your investments are (or are not) consistent with your objectives. How do you go about setting up a framework which tailors your investments to your particular circumstances?
A sound portfolio management strategy begins with asset allocation – that is, dividing your investments among the major asset categories of equities, bonds and cash. Since each type of investment category has unique characteristics, they rarely rise or fall at the same time. Then, you can make finer distinctions within each asset category (i.e., diversification). Combining different asset classes could help reduce risk, although it doesn’t eliminate market risk altogether. Still two nagging questions remain: What factors guide the asset allocation process? How much of a portfolio should go into each category.
To answer the first question, the main objective of asset allocation is to match the investment characteristics of the various investment categories to the most important aspects of your personal investment profile – that is, your tolerance for risk, your return and liquidity needs, and your time horizon.
Investing according to your risk tolerance will help keep you from abandoning your investment program during times of market turbulence. One way to measure your risk comfort zone is to ask yourself how much of a loss in a one-year period you could withstand and still stay the course.
Finding an appropriate match for you means balancing your tolerance for risk against the different volatility levels of various asset classes. For example, if you have a low tolerance for risk, that fact may dictate a portfolio that emphasizes conservative investments while sacrificing the potentially higher returns that usually involve a greater degree of risk.
Return need refers to the income and/or growth you expect a portfolio to generate in order to meet your objectives. For example, retirees may prefer a portfolio that emphasizes current income, while younger investors may wish to concentrate on potential growth.
Your personal time horizon extends from when you implement an investment strategy until you need to begin withdrawing money from a portfolio. For example, a very short time horizon (less than 5 years) is probably best served by a conservative portfolio emphasizing safety of principal. On the other hand, the more time you have to invest, the greater risk you may be able to withstand because you have time to recover from market downturns.
The short answer to how much of a portfolio should go into each category is that asset allocation is more a personal process than a strategy based on a set formula. There are guidelines to help establish the general framework of a well-diversified portfolio. For example, you may decide on the need for growth in order to offset the erosion of purchasing power caused by inflation.
However, building an investment portfolio that is right for you involves matching the risk-return tradeoffs of various asset classes to your unique investment profile. One final point that is worthy of emphasis – when you put together your own asset allocation strategy, you should combine all your assets (i.e., your investments and retirement savings). That way you can ensure that all your assets are working together to help meet your goals and objectives. Keep in mind, investment return and principal value will fluctuate with changes in market conditions so that shares may be more or less than original cost. Diversification cannot eliminate the risk of investment losses.
Annuities have been around longer than the United States, but it wasn’t until the Great Depression that they started to become popular. In the 1930s, Americans who were concerned about the health of the financial markets turned to products offered by insurance companies because they were seen as more stable.
Since that time, an array of annuity products has been introduced, including the variable annuity in 1952.2 During the past half century, variable annuities have been both embraced and reviled. Their complexity is a common source of confusion, which means any decision to buy a variable annuity should be made carefully and with proper guidance.
Nonetheless, a variable annuity could play an important role in a retirement portfolio. These facts about variable annuities may help you understand them better.
A variable annuity is a long-term investment vehicle designed for retirement purposes. It is a contract in which one or more payments are made to an insurance company, which agrees to pay the contract holder an income in the future. The interval between when the contract is purchased and when it begins producing income is usually several years, which may make a variable annuity less appropriate for older investors. Withdrawals of annuity earnings are taxed as ordinary income and may be subject to a 10% federal income tax penalty if made prior to age 59½. Surrender charges may apply if the annuity is surrendered during the early years of the annuity contract.
A variable annuity can take advantage of the growth potential of the stock market, but it can also lose value. It is variable because the future value relates to the performance of underlying investment subaccounts that are selected by the contract holder, usually according to his or her risk tolerance. Because variable annuity subaccounts fluctuate with changes in market conditions, the principal may be worth more or less than the original amount invested when the annuity is surrendered.
For an additional cost, the contract holder may be able to purchase guarantees, such as a guarantee of minimum fixed income payments or a guarantee to withdraw a specific amount over a lifetime, regardless of the account value. Any guarantees are contingent on the claims-paying ability of the issuing company. The investment return and principal value of an investment option are not guaranteed.
There are contract limitations, fees, and charges associated with variable annuities. These can include mortality and expense risk charges, sales and surrender charges, administrative fees, investment management fees, and charges for optional benefits. Withdrawals reduce annuity contract benefits and values. Variable annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association.