Carolyn Howard, CFP® shares her insights in response to reader questions on Investopedia Advisor Insights:
Q: I have a 401(k) with my new employer; should I roll my traditional IRA into my new 401(k) account?
I was advised to roll my 401(k) plan from a previous employer into a traditional IRA, which I did. I haven’t made any contributions to it since rolling it over, and it has grown very little. I have a 401(k) with my new employer; should I roll my traditional IRA into my new 401(k) account? I feel that if I combine them, my money and 401(k) will grow the most. I was advised to leave my traditional IRA at the company that it is at, so I am not sure what my best option is.
A: You can choose to leave your rollover IRA as is. You have more flexibility in your investment options with the IRA. You can also choose to put it into your new 401k if you like the choices available for investing. Having only one account can provide simplicity when making investment decisions. Your choices are dependent on what you want to do. The growth on your IRA and 401k are dependent on your investment choices and asset allocation. If both the IRA and 401k have the same asset allocation and similar funds, they should grow at the same rate. Your decision is more of a personal decision than an investment decision.
Q: Does the IRS call you and accuse you of fraud and ask you for money?
I received a call from a woman who gave me her name and an ID number informing us that the IRS is charging us with fraud and that we owe them $8,140. We are retired on Social Security and have not owed any taxes for more than fifteen years. Is this a scam?
A: It is excellent that you are asking this question. The IRS does not call you and inform you of anything. This is a SCAM. You can contact the IRS directly and inquire of this information. This person that called is just trying to steal money from you. You should be very proud of yourselves for being aware of these kinds of calls. Keep up your good work.
Q: Should I use annuities as a temporary investment?
I invested in a four-year fixed annuity several years ago to allocate a percentage of my portfolio into a vehicle that was conservative. At the time, it was the safest, risk-free investment recommended by my investment adviser. The annuity is set at 4 percent annually. I am a long-term aggressive investor who makes about 12-15 trades a year. My retirement horizon is between 2-5 years away from now. Is this a safe strategy going forward?
A: Annuities can be useful as a bond alternative especially as interest rates are rising. If you have bonds as part of your portfolio, the bonds or bond funds could be losing value since bond prices decline as rates rise. You state the annuity is earning 4%/year. As you approach retirement, the 4%/year with downside protection during market corrections could be a valuable part of your retirement strategy. You may consider your retirement goals as you near that target in 2-5 years. One of the things to consider are your income needs during retirement and the risk tolerance during withdrawal years. With your “long term aggressive strategy”, you may experience a market downturn during the withdrawal period that could ultimately impact your lifestyle. You would not have that risk with the annuity. Consult your investment advisor to review your retirement goals, income needs, and the amount of risk your income needs can tolerate.
Q: What does “period certain” mean on an annuity contract?
Period Certain on an annuity contract can mean a couple of different things. It could mean that you have a guaranteed amount of time to receive the income from the annuity when you begin taking the income. You make this decision when you purchase the annuity. If you should predecease that time frame, your beneficiaries would be eligible for the remainder of the income. Another common use of period certain is when you buy an annuity and choose at application time that you want a lifetime income with a period certain, for example, of 20 years. You will be given a lifetime income by the annuity company but if you should predecease the 20 year period certain, your beneficiaries would be eligible for the remainder of the income. You can also choose to receive a lifetime income without a period certain. You will receive the maximum income payout with a lifetime income without the period certain. There are options that insurance companies have for the various types of annuities. Please review them carefully.
To read all of Carolyn’s answers to reader questions on Investopedia, click here.
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