Risk-free investing in a 401(k)
I have $100,000 sitting in cash in a 401(k) money market
fund from an earlier stock investment. Where can I get the highest
rate of interest for the shortest period of time (six, nine, 12
months) with little or no risk, and still keep it in a tax-exempt
-- Bill Bear
The typical 401(k) plan has limited investment choices
spelled out by the plan. From that universe of investment choices
you would choose the one that minimizes your risk while meeting
your investment horizon -- in this case six to 12 months. In many
plans that's something called the "stable value fund"
or guaranteed investment contract, or GIC. Alternatively, the plan
may have a money market fund as an investment choice.
Money in a 401(k) isn't tax-exempt --
it's tax-deferred. You'll owe income tax in the tax years when
you take distributions out of the plan. The distributions are
taxed as ordinary income. There are some exceptions in this area,
like the tax treatment of company stock out of a 401(k)
plan into a taxable account that qualifies as net unrealized appreciation,
or NUA, but it doesn't sound like that's your situation.
If this is a 401(k) plan held with a
previous employer, you can do an IRA rollover to a mutual fund,
brokerage or bank IRA rollover account. It's best to do a direct
or trustee-to-trustee rollover so you don't have to worry about
your previous employer subjecting the funds to mandatory withholding
taxes. If company stock is involved, you want to talk to your tax
professional about the NUA issue before rolling the money over. An
earlier Dr. Don column, "Risk
of rolling over 401(k) with company stock,"
has more on rollovers and NUA.
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