Here’s The Situation… For 10 or more years you’ve been stuffing money into a qualified retirement plan, (401k, 403b, Etc.) and now you’re ready to switch jobs, ready to retire, or maybe you’re already retired… What do you do with the money that’s in your current plan?
Well you have three basic options:
1. You Can Leave the Money Where It Is – The concerns with this option: You are required to move the money when you leave; you may be giving up some control over how your money is being invested; or if you need money in the future, there may be problems gaining quick access to your money.
2. You Can Cash It In – If you cash it in, you‘ll have to pay taxes on the entire amount, and if you’re under age 59 ½ there is a 10% early withdrawal penalty.
3. You Can Roll Over The Money Into An IRA This is probably the smartest move for most people…If you roll this money into an IRA you can defer paying taxes on the money, and avoid the tax penalties if you are under age 59 ½.
An IRA is not really an investment, but rather a type of account set up by the IRS tax code. Your IRA can be funded with various investments inside the plan. When you roll your money into an IRA, you’ll need to find the right investments to reach your retirement goals and needs.
What are some of the common IRA Vehicles?
Mutual Funds – You can use a mutual fund as the investment inside your IRA. However, you are investing in the market, and have the risk that if the market goes down, you could lose money.
Bank Products – CD’s and Money Market Funds– While these investments offer you safety and liquidity, there is also the risk that you will have less buying power in the future. This is because you’ll generally receive a low rate of return on your money, and worse, you could lose spending power due to inflation. Example: A money market account earning 2%. Now subtract inflation @ 4% and your 2% return is - 2.0%. (2% - 4% (inflation) = -2.0%)
Annuities– There are 3 basic types of growth annuities
– Fixed, Indexed and Variable.
Fixed Annuity– A Fixed Interest Rate Annuity, pays you a guaranteed fixed interest for a specific period of time. There is NO risk of loss, and historically they have outperformed CDs and Money Market Accounts. However, it may not provide as much of a hedge against inflation. (4.5% - 4% (inflation) = 0.5%)
Indexed Annuity– These annuities have the ability to get stock market type returns, without the downside risk. (No Loss of Money!) Because they have the potential for higher returns, with safety and guarantees, they can create a better hedge against inflation, so your savings will not lose its spending power!
Variable Annuities– Variable annuities have sub accounts that are much like Mutual Funds. There is a risk of losing some of your money. However, with some of the new riders, for a fee, you can minimize those potential losses. Annuities can offer you a safer and more secure retirement option - with rates of return that are better than most bank CDs, Savings Accounts or Money Market Funds. And, they can provide a hedge against inflation, while minimizing the risks to your investments. The principle drawback is there may be penalties for early withdrawals, and you could lose money.
So, it is important to find the one that best suits your needs. For help or more information, call my office today!