Many employers offer retirement plans that allow workers to squirrel away pre-tax dollars. A 401(k) allows you and your employer to deduct the money contributed. The money grows tax-free, but you must include the withdrawals in your taxable income. You can roll over your 401(k), but the timing must be right.
You can grab your 401(k) money when you leave your job, become disabled, reach age 59 1/2 or suffer financial hardship. The money will also become available if you are a reservist called to active duty for at least 180 days or if your employer ends the plan without replacing it. Except for hardship distributions, you can roll the 401(k) money tax-free into another employer plan or into an individual retirement account. You can’t roll over 401(k) money stemming from required minimum distributions, substantially equal periodic payments, nondeductible employer contributions, loans, employer stock dividends or the cost of any life insurance provided by the plan.
If you are interested in putting your rollover money into a Treasury-only money market mutual fund, you’ll need to identify an IRA custodian that offers this option. Almost all mutual funds offer IRAs and all have money market funds. You’ll have to check whether they offer one limited to Treasury securities. Open an account with your chosen custodian and request a trustee-to-trustee transfer from your 401(k) to your IRA. Alternatively, you can receive a check and deposit it within 60 days to your IRA. If you miss the deadline, you might owe taxes and penalties. Your employer will withhold 20 percent of money you withdraw from your 401(k) unless you do a trustee-to-trustee transfer.
Money Market Mutual Funds
A money market mutual fund is an interest-bearing account that attempts to maintain a price of $1 per share. You mustn't confuse this with a bank money market account that is insured by the Federal Deposit Insurance Corporation. Money market accounts invest in a variety of short-term debt -- not limited to Treasury bills. A Treasury-only money market mutual fund invests in short-term Treasury bills. Most mutual funds insure their funds through the Security Investor Protection Corporation, but this private insurance doesn't guarantee the value per share. Treasury securities are backed by the full faith and credit of the U.S. government.
A Treasury-only money market mutual fund offers reasonable safety, but returns that might be puny. For example, the Wells Fargo 100 Percent Treasury Money Market Fund returned 0.00 percent for the 12-month period that ended on June 30, 2013. During that period, the inflation rate was 1.8 percent. If you invest your 401(k) money in a return-free fund, you will lose buying power and seriously threaten the value of your savings. While a Treasury-only money market mutual fund might be a part of your investment strategy, you will want to consider the long-term damage you might suffer if you place all your money there.
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