The How and Why of Rolling Over Your 401(k) or 403(b)

If you’ve got an old 401(k) or 403(b) from a previous employer, you may have wondered whether or not to roll it over into an IRA. The answer is “YES”, you should roll it over into an IRA, because it will give you more control over your own money. If you leave it in the 401(k), someone else is making decisions about your money, not you.

Once you decide you want to roll it over into an IRA, you’re probably going to wonder what should you put the money into? Another mutual fund? That’s definitely not what I would do, because I would be thinking about the next market crash. Do you really want to see a repeat of what you lost in 2008? How much money did you lose? By the way, we see a market crash about every 4 to 6 years. If history repeats itself the next market crash could be right around the corner, because we’re at the end of the market’s typical 4- to 6-year cycle.

It’s really not a question of if the market will crash, it’s just a question of when. The bottom line is that you want to be protected BEFORE it crashes. Obviously, this also applies to any of your existing IRAs and any other money you have in stocks and mutual funds.

Okay, so where should you put your money? If you want to protect your hard-earned money from loss, you should consider fixed Indexed annuities. Fixed indexed annuities let you take advantage of market gains with none of the downside risk. With a fixed indexed annuity, your principle is guaranteed by an insurance company against market losses. There is also an annual reset. Every year the interest you earn becomes part of the principle, so the interest that you earn is also guaranteed to be protected from market losses too.

You may have heard people say annuities are bad, stay away from them. The truth is fixed indexed annuities are not for everyone. Just like some people say statin drugs are bad, stay away from them. The truth is statin drugs are not for everyone, but for the right people statin drugs are life-saving. For the right people, fixed indexed annuities are financially life-saving.

Fixed indexed annuities are not to be confused with variable annuities. Variable annuities are not guaranteed and they can lose money when the market goes down. So what’s the downside to a fixed indexed annuity? Basically there are 2 downsides:

Number 1: Fixed indexed annuities have surrender charges if you take the money out too soon. However, after the first year you can pull out up to 10% of the money each year, with no surrender charges. To understand surrender charges, think of a bank CD. If you buy a 5-year CD at a bank and you pull the money out before the 5 years are up, the bank charges you a penalty. Fixed annuities work in a similar fashion, but after the first year, you can to access up to 10% of the money each year penalty free.

Remember, this is retirement money, it is money that you don’t want to access until retirement anyway.

Number 2: Fixed annuities have caps or participation rates. A cap is a limit on how much interest that you can earn in any given year. A participation rate means that you get a percentage of whatever the market gains are with no caps or limits.

The biggest benefits to fixed index annuities is they give you a reasonable rate of return and you don’t lose money. If you want to be sure that your money will be there waiting for you when you retire, rollover your old 401(k) or 403(b) into a fixed indexed annuity.

If you have questions send me an email to David@TheAlemianFile.com and check out my website www.PhysiciansRetirementPlan.com. Make sure you come back here to Physicians Money Digest for another edition of The Alemian File.