- When you execute a rollover from a 401k plan, you have two options. The first is to have the 401k custodian send you a check directly. Your employer will withhold 20 percent to pay income taxes on the withdrawal. From the time they send you the check, you have 60 days to complete the transfer of money into your new plan or IRA account. If you don't, the IRS will deem that you have taken a distribution, and you will be assessed income tax on the entire amount withdrawn, as well as a 10 percent penalty if you are under age 59 1/2. To avoid this, have your 401k custodian send the money directly to your new plan or your new IRA. This avoids the withholding issue and you won't have to worry about dropping the ball on the 60-day window.
- If you want to eliminate the possibility of market loss in your IRA, you can invest the proceeds in a risk-free savings vehicle. Examples include certificates of deposit, or CDs, which are FDIC-insured to $250,000 per depositor, and money markets, which are not FDIC insured. Returns are low, compared to other riskier investments, but you should have no trouble getting your principal back quickly.
- The United States Treasury is widely considered to have unquestioned credit quality. The scheduled payment of interest and return of principal is assured, provided you hold the bonds to maturity. However, the prices on these bonds can fluctuate while you are waiting for them to mature. If you need to sell the bond prior to maturity, you can possibly lose money. You also can purchase a fixed annuity. These annuities promise a guaranteed rate of return for a given number of years, although they typically impose surrender charges. You may have to pay a fee to get at your money for a number of years after the purchase.
- Inflation can pose just as much of a threat to the purchasing power of your portfolio as market losses. To hedge against inflation risk, consider purchasing treasury inflation-protected securities (TIPS). These are treasury bonds that pay an interest rate linked to the consumer price index. When inflation heats up, the bond pays more interest to compensate. Because TIPS provide guarantees against credit losses and inflation, they are considered very safe, conservative investments, provided you hold the bonds to maturity.
- You must also guard against the possibility of living longer than your income. You can guarantee an income for life by purchasing a lifetime income annuity (LIA). These annuities simply provide you with a steady paycheck every month or every year for the rest of your life, or the combined lifetimes of yourself and a beneficiary. These also are considered extremely safe, although they are subject to the claims paying ability of the issuing insurance company.
- Advertisement -
- Advertisement -