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  Ask Dr. Don By Don Taylor, Ph.D., CFA,    

Can't retire on $48,000

Dear Dr. Don,
I currently have a 401(k) in which I have about $48,000. My question is: If I leave my company now and take out this amount, is it possible to roll it over into a fixed monthly income investment? If I can roll it over, how much of the $48,000 would I be able to receive when I leave? Would there be any fixed monthly income investments that I could roll over the money I receive and have a monthly income of at least $1,200? Thank you.
-- Byron Bounty

Dear Byron,
It's completely unrealistic to expect $48,000 to give you monthly income of $1,200 for any length of time. The investment would have to earn about 30 percent annually to make it work as a 40-year annuity. You can get an instant annuity quote online, with no pesky sales people contacting you, by using I did and found that you would need about $236,000 to purchase an annuity paying $1,200 a month over your lifetime (assuming you are 48 years old) with no residual payments to a beneficiary.

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When you leave your employer, one of your choices with your 401(k) account is to move the holdings into an IRA rollover account. If the 401(k) holdings are in the company's stock, however, that may not be your best tax move.

Roll the 401(k) to an IRA rollover account and you will have the ability to annuitize distributions out of the account and, by doing so, can avoid paying the 10-percent additional tax typically due on early distributions, although you would still owe income taxes on the distributions. According to IRS Publication 590, Individual Retirement Arrangements (IRAs):

The payments under this exception must generally continue until at least five years after the date of the first payment, or until you reach age 59½, whichever is later. If a change from an approved distribution method is made before the end of the appropriate period, any payments you receive before you reach age 59½ will be subject to the additional tax. This is true even if the change is made after you reach age 59½. The payments will not be subject to the 10% additional tax if another exception applies or if the change is made because of your death or disability.

Consult with your tax professional before deciding to take this step.

-- Posted: Aug. 13, 2004

  More questions from Dr. Don

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See Also
What is an annuity and does it belong in your IRA portfolio?
Why annuity sales have skyrocketed
Financial advice glossary
More Dr. Don stories

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