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Rolling over a 401(k) into an IRA

Dear Dr. Don,
I want to move my 401(k) plan from my former employer to an IRA rollover account and do my own type of investing.

Can I put it into a bank account, such as a certificate of deposit? I could get between 4 percent and 5 percent. I have another choice to go with an S&P 500 index fund that is a no-load fund with a small handling fee.
Lor Low-risk

Dear Lor,
You can open an IRA rollover account with a bank and invest that money in CDs. Bankrate can even show you which financial institutions offer the best rates on IRA CDs in your market or nationwide on its IRA home page.

You have many choices when it comes to where you can move your money, so I don't know why you're limiting yourself to either a CD or an S&P 500 index fund. You could open an IRA account at a brokerage firm and invest in stocks, bonds or mutual funds.

You could also open an IRA account directly with a no-load mutual fund. If you decide to move the money later, you can roll it into a different IRA account.

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You didn't tell me how much money is in the 401(k) account, how close you are to retirement or what portion of your total investment portfolio that this money represents, but seeking the shelter of an FDIC insured CD with a guaranteed return of 4-5 percent isn't necessarily your best investment decision.

How your money is invested and what retirement account contributions you need to continue to make will depend on both your financial goals and your ability to continue to make contributions.

Investing in insured CDs will protect your principal, but won't give you the opportunities for growth that the stock market can over time. It's been a rough couple of years in the stock market, but the 10-year annualized total return on the S&P 500 index is still over 14 percent through the end of November 2001 while the five-year annualized total return is about 10 percent.

The longer you have until your planned retirement the more willing you should be to keep some of your investments in the stock market. Consider putting some money in both the CD and the index fund.

It isn't always best to move company contributions of corporate stock into an IRA rollover account.

-- Posted: Jan. 8, 2002

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See Also
Don't put investing eggs in one basket
Frequently asked questions about 401(k)s
Is a Roth the right IRA for you?

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