How to Invest Your 401(k) Rollover for Income

Stocks and bonds can both produce income.

Stocks and bonds can both produce income.

When you have the opportunity to roll over funds from an old 401(k) account, you don't have to cash them out to reinvest them. Whether you put them in a new 401(k) account or move them into an IRA, you can keep them working for you. Choosing income-based investments helps to grow your account's cash balance.

Research types of income-producing investments to find suitable ones for you. An income-producing investment is one that pays dividends or interest, as opposed to a growth-focused investment that pays its returns in increased share prices. Bonds, bank accounts and real estate investment trusts are all income-producing investments while dividend-paying stocks sometimes straddle between the worlds of income and growth. Generally, investments paying lower returns, like short-term government bond funds or certificate of deposit accounts, have lower risk than higher-return investments like dividend-paying stocks or high-yield bond funds.

Choose a specific investment that meets your goal. When comparing your different options look at factors like historical returns, which tell you the performance of the particular investment you're considering, and at the total fees, since high fees eat into your returns. Look at the offerings in your current employer's 401(k) plan, if you have one, to see whether it's competitive. Sometimes rolling your money into your new 401(k) is the best option.

Open an account with a company that offers an IRA that will let you buy your chosen investment. Many investment companies offer IRAs with few, if any, fees, so that you can keep as much of your money working for you as possible.

Roll your funds over. If you're using your new employer's 401(k), your plan administrator can help you. If you're using a new IRA account, that provider's rollover department can give you guidance. Usually, you have your old 401(k) company send a check or wire directly to the new account provider, made out to them but with your name as a reference.

Buy shares of your desired investment once the funds clear.

Warning

  • If the entire rollover processes isn't completed in 60 or fewer days, your entire 401(k) balance could be subject to tax and penalties. It's important to complete your rollover as quickly as possible.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

Photo Credits

  • Creatas/Creatas/Getty Images