IRA Investment Choices
If you are considering a 401k rollover, cashing out a 401k, a 401k withdrawal, and want to know how to transfer a 401k to IRA, you should be aware of your 401k rollover options once you authorize a 401k rollover to an IRA.
Individual Retirement Accounts (IRAs) are accounts and not investments. They are accounts that permit you to defer taxes on the earnings of the actual investment(s) in which your retirement funds are placed while invested.
While an IRA can be a traditional IRA or a Roth IRA, the investments allowed in each are the same. The same investment purchased in the same quantity on the same day will have the same performance. The difference is how each is taxed when a withdrawal is made.
Withdrawals from a traditional IRA are tax-deferred meaning that taxes are paid at some time in the future. Withdrawals from a Roth IRA are tax-free, meaning that there are no taxes owned under certain conditions. Those conditions generally are the requirement that the account owner is at least 59 ½ and the account has been opened for at least five (5) years.
Investment options for 401k rollovers will be either fixed-income oriented or growth-oriented. Fixed-income options will generally be money market accounts, certificates of deposit (CDS), corporate bonds, government bonds, mortgage-backed securities, fixed annuities, indexed annuities, and bond-oriented mutual funds, that may invest in corporate bonds, government bonds, mortgage-backed securities, in each class or collectively. With each of these investment options, earnings will be based upon the going interest rate at the time of investment.
The general rule is the greater the investment period, the greater the interest rate. The interest rate generally is fixed for a set period of time and the amount of income earned is based upon the interest rate. If the going rate at the time of the 401k transfer to an IRA is 2% for a term of five (5) years, someone rolling over a 401k valued at $100,000 would earn $2,000 each year for five (5) years.
Growth-oriented options for a 401k rollover, 401k transfer or 401k payout include individual stocks, stock-oriented mutual funds, unit investment trusts (UITs), exchange-traded funds (ETFs), and variable annuities. When a person purchases a share of stock, they are buying ownership in a corporation. That corporation is owned by thousands of owners, known as shareholders. When a corporation earns a profit, its board of directors may elect to pay its owners a portion of those profits. Those profits are known as dividends. If a company doesn’t pay a dividend, it owner is seeking an increase in value over time of the asset (stock) that they own. A stock-oriented mutual fund will invest in a portfolio of stocks – some as few as twenty-five (25) and others could own a thousand or more (1,000+). Owners of growth-oriented investments potentially have two (2) opportunities of earnings – increase in value (also known as equity, appreciation, or capital gain) and dividends.
401k rollover options do not have to be limited to an either/or scenario, but can include both fixed-income oriented options and growth-oriented options.
Jones Wealth Management Group can help with your 401k rollover and offers a wide variety of rollover investment options for a 401k rollover or 401k withdrawal. We can answer questions of how to roll over a 401k and provide assistance with the process. Let us develop a retirement income plan for you that is strictly fixed-income oriented or one that finds a comfortable balance between fixed-income with the potential for increasing income in retirement. Click here to contact us or call today at 901-312-9166 or 800-754-1218 to learn more about your IRA rollover choices and current rates on 401k rollovers.