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Dr. Don Taylor, CFA, Bankrate.com advice columnistRisk-free investing in a 401(k)

Dear Dr. Don,
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 status.
Thank you,
-- Bill Bear

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Dear Bill,
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.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "financing a home," "saving & investing" or "money."

Bankrate.com's corrections policy -- Posted: Sept. 12, 2006
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