Your options for moving your 401(k) funds depend on your circumstances; depending on them, they could include rolling them over into a plan at your new employer or opening an individual retirement account (IRA).
Assuming you want a tax-free transition, direct rollover is usually best. This involves your old 401(k) administrator sending the funds directly to your new plan or IRA provider so no taxes are withheld from them.
Target-date funds
Target-date funds are an increasingly popular investment choice among those saving for retirement, and are usually offered as the default investment option in most employer-sponsored plans. They automatically rebalance to find an ideal mix between risk and safety as you near retirement day, while offering lower fees than other options. It is important to review your target-date fund periodically so as to see how it fits into your overall investment strategy.
Target-date funds offer one great benefit of retirement savings: they offer a comprehensive solution. However, using them alone might rob you of some potential returns of having a diversified portfolio. Therefore, experts suggest reviewing both your target-date fund’s performance as well as any assets held once every year.
Stocks
Stocks are securities representing partial ownership in publicly traded companies that provide investors with returns through price appreciation or dividend payments. Investors can purchase individual stocks or invest in mutual funds or exchange-traded funds that hold them.
Investing in company stock can be risky business, particularly if a company goes bankrupt; shareholders typically are placed last in line for receiving money owed to them after employees and vendors.
If you own company stock in your 401(k), considering rolling it over into an IRA may help preserve its value and avoid taxes on it. Your employer will withhold 20% for IRS costs as part of this distribution, known as your cost basis.
Bonds
Bond investing involves lending your money to either a company or government entity and they promise to repay your principal with interest at some later time. Although bonds appear safe, their long-term returns tend to be lower due to inflation which reduces purchasing power over time.
Bond funds often decline in value as interest rates and inflation rise, so allocating too much of your 401k plan’s default allocation toward bond investments could prove costly in the future. Rebalancing is key; check your fund notices to determine your current allocation status; NerdWallet also has an easy-to-use IRA calculator available that can assist you with finding an asset allocation strategy suitable to you.
Money market funds
Money market funds are low-risk fixed-income mutual funds that invest in short-term debt securities such as Treasuries, bank certificates of deposit and commercial paper. Money market funds are considered one of the safest options for any portfolio.
Stock exchanges strive to maintain a net asset value (NAV) of $1 per share with special pricing and valuation conventions, though this figure has dropped occasionally due to financial crises.
With interest rates skyrocketing, money market funds have never been more lucrative. You have the option of choosing from government, prime or municipal money market funds – each offering tax-exempt securities for federal, state and sometimes local tax exemption. Inexpensive withdrawal fees don’t incur with these investments either!
Real estate
Real estate can offer both diversification and higher returns; however, investing in it with your traditional 401(k) requires careful planning and specific rules that must be observed. Consulting a financial advisor specializing in self-directed solo 401(k)s may help ease this process and it is wise not to mix personal funds and retirement accounts too closely in order to prevent prohibited transactions or tax events that would necessitate withdrawing funds out of an account for use elsewhere.
No matter if you are purchasing an all-cash investment property or participating in a tenants-in-common transaction, understanding how to leverage your IRA assets with non-recourse loans can help increase return on investment (ROI) while simultaneously decreasing risk. But it also comes with challenges, including early withdrawal penalties and management responsibilities that need to be considered carefully before taking this approach.