A 401k is the most commonly-owned retirement account in the United States, and there are hundreds of 401k investments from which to choose. A 401k investment is often the easiest way to save for retirement, because you simply fill out some forms when you begin working, and your employer will transfer a percentage of your salary (of your choosing) into your 401k account during each pay period. They may even offer matching funds and put a similar amount into your retirement account for you. When you have a 401k account, you have limited control over the way that the funds are invested.
Types of 401k Investments
Different investment firms manage 401k accounts, and your employer will choose the firm that manages your 401k. They will give you options that allow you to balance your stocks and choose the risk level that you want to take with your investments. The funds are generally put into mutual funds where the money is spread over a wide number of different stocks. This helps to reduce the risk. The rate of return on your investments really depends on how well the fund manager does his job. When the market goes down, you may lose some of the money in your account, but as the market recovers, so should your retirement account.
Balancing Your 401k Investments
When you sign up for a 401k, you will have the option of choosing between the different risk levels between the funds. Most employers only offer 401ks through one firm, so all you can choose is your risk level.
- High Risk High Yield Funds: These funds are a good option when you are younger, in your twenties or thirties. These are aggressive funds and offer the biggest rate of return. However, the funds are also the riskiest and the most volatile. The value of the funds may go up and down. As you grow closer to retirement age, you will want to move to more conservative funds, because you may not be able to wait for the market to recover.
- Mutual Funds: Generally, these are the middle risk option. The growth rate is higher than the most conservative option, while the risk is lower than with the high yield funds. These are usually mutual funds as well. You should have a portion of your retirement in this type of investment while you are working.
- Bonds and Low Risk Funds: The third option is a low risk option. The rate of return on these funds is a lot lower, but the risk is a lot less. As you get closer to retirement age, you should begin to balance your 401k portfolio so that you have more and more of your retirement funds invested in this type of fund. This means that you will likely have more money available to you when you are ready to retire.
As you get older, you will want to balance your portfolio every 5 to 10 years. For the most part, you should invest your money in your retirement accounts and not worry about it. The market is going to fluctuate, and if you panic every time the market drops and move to more conservative funds, then you will lose money.
Rolling your 401k into an IRA for More Options
If you want more control over your retirement funds, and you would like to diversify your investments to include more options, you may want to consider the difference between a 401k vs IRA and a 401k rollover. This is especially true of 401ks that are with past employers. Each time you switch employers, you leave your 401k behind. It can be tricky to manage all of the funds, and to keep up with them. Rolling the orphaned 401ks accounts into an IRA will make it easier to see how much you have saved for retirement.
Types of 401k Investments for an IRA
When you roll your 401k into an IRA, you’ll get the opportunity to invest in a wider range of IRA investment options than was possible in your company 401k account. The types of investments available to you really depend on where you open your IRA.
- Self-Directed IRAs: If you are looking for more control over your investments, you will want to find a firm that offers a self-directed IRA. You have the option to invest in property, gold and a wide variety of investments.
- Bank or Credit Union: If you want more conservative investment options, a bank or credit union is your best option. When you open an account here, your investments will be in Certificates of Deposit. The FDIC guarantees the money up to $250,000. However, the rate of return on these investments is often the lowest.
- Traditional Investment Firm: You can invest in a typical investment firm, and the investments will be very similar to the type you can choose with a 401k. If you like the way your 401k is working, but you want to consolidate your orphaned 401ks, then this is a good option for you.
Self-Directed IRA Investments
Self-directed IRAs are the best option if you want more control over your investments. You can invest in a wide variety of options, and if you want to steer clear of the stock market or just add more diversity to your portfolio, this is the best account option to you. You can invest in rental property, gold and businesses, as well as the stock market.
These investment options are good if you are confident on how you want to invest and if you are ready to manage those investments yourself. A self-directed IRA will issue a checkbook that allows you to purchase the investments yourself and put them in the name of the IRA. There are rules about the transactions you are allowed to complete. You cannot do business with yourself or family members, so you could not buy an investment property from yourself and put it in your IRA. You also cannot live in any of the property you own. You cannot buy yourself a vacation home with the money in your IRA. The investment firm you choose should go over the rules with you, but you will be largely responsible in making sure that you follow them to avoid penalties and fines.
Rolling Over Your 401k Investments for More Options in an IRA
When you are ready to have more control over your retirement accounts, you can roll them over into an IRA. Just contact your 401k plan’s administrator and ask for the 401k rollover forms to begin the process. You have 60 days to complete the transaction so that you can avoid any penalties and fees associated with an early withdrawal. When you are ready to learn more about the IRA options in your area, call (800)-767-1423.
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