 Retirement
returns depend on your investments
|  Dear
Dr. Don,
I have about $10,000 invested in a 401(k) plan with
my former employer. The money has earned a conservative amount of
interest over the years. However, I'd like to invest these monies
in a more profitable retirement plan than a 401(k).
Would you please kindly suggest some to me? I'm a civil engineer,
37 years old, married and have owned a single-family house for two
years. -- Concerned Kathy
 Dear
Kathy,
A 401(k) plan typically gives its
plan participants a selection of investment choices, and the ability
to move account assets from one investment to another is within
those choices. What will make a difference in the return on investment
isn't the type of retirement plan, but how the money is invested.
A possible exception to this is the difference in tax treatment
for a Roth IRA versus a traditional IRA or 401(k) plan.
It's common for former employees to move money away
from the previous employer's 401(k) plan, either because
they don't like or trust the plan, or because they are looking for
different investment choices. The opposite can also be true. I have
403(b) money with a prior employer, in part because
it allows me to invest in mutual funds that I wouldn't qualify for
as an individual because I couldn't invest the account minimum for
that mutual fund.
So, it's how the money is invested, not what type
of retirement plan it's invested in that's most important. You could
do a direct transfer from your 401(k) account to an
IRA rollover account or move the money to the 401(k)
plan of your current employer.
Beyond what you can invest in, you also want to keep
an eye on annual fees and expenses on your investments. Sales loads
and commissions reduce your realized return, as do annual expenses
and account fees.
If you decide to do an IRA rollover, I would suggest
that you consider dealing directly with a mutual fund family that
offers no-load mutual funds and invest in a no-load index fund or
funds appropriate for your financial goals and risk tolerance. No-load
lifestyle funds that invest in index mutual funds are another approach.
There are a host of mutual funds that meet these parameters, but
three fund families to consider include: Fidelity, Vanguard and
T. Rowe Price. Use Morningstar's free mutual-fund
screening tool to find additional no-load funds.
If part of your 401(k) is invested in
the company's stock, there are some tax advantages to not cashing
in the shares and rolling the proceeds into an IRA or another company's
401(k). Not all companies offer a lump-sum distribution
option for company stock, so you'll need to check with your plan's
administrator. If this is an option, ask your tax professional to
help you decide if a lump-sum distribution of company stock is the
right decision for you.
With tax-deferred retirement accounts like a 401(k)
or IRA, contributions are generally made with pretax dollars and
distributions from the account are taxed as income. A Roth IRA is
different because it is funded with after-tax dollars, but qualified
distributions are free of federal income taxes. It's possible, if
eligible; to roll your 401(k) monies into a Roth IRA
by first converting the 401(k) to an IRA rollover account
and then converting the IRA to a Roth IRA, but you would have to
pay income taxes on the rollover. Don't take this approach without
consulting with your tax professional.
Editor's note: Dr. Don has
investments with Fidelity and Vanguard.
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