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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

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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.'s corrections policy
-- Posted: Sept. 2, 2005
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