Assist your client's decision to reinvest 401k funds in an IRA rollover. More than three-quarters of all IRAs are IRA rollovers. Clients may fund an IRA rollover with funds from a 401k when leaving an employer. Provide several suitable custodians for the rollover. Discuss the arrangement of a direct rollover of 401k assets to the new custodian plan to avoid tax penalties. Discuss an overview of the IRS Code concerning 401k rollovers. Your client shouldn't request a check from the existing 401k plan made out in her name, even if she plans to reinvest the money within 60 days. She'll avoid mandatory 20 percent withholding taxes from the 401k plan by taking your advice.
Fiduciary Responsibility. Present several plan sponsors for your client's consideration, and discuss the pro's and con's of each sponsor:
- Allow your client to choose a plan sponsor, rather than recommending just one
- Compare fees and costs to invest in each plan with your client
- Discuss how long each plan sponsor has been in business and the controls in place to ensure the safety of your client's funds
- Review rollover requirements according to IRS Topic 413.
Bond Investments. Author Harold Bierman, Jr. of The Bare Essentials of Investing suggests bond investments as a reasonable investment for your client's tax-deferred IRA Rollover. Investment-grade bonds rated A or better have an established track record of making timely interest payments. U.S. Treasury securities bear the lowest risk to investors. Treasury bills, bonds and notes are backed by credit of the United States government. Select maturity dates from a few months to 30 years to diversify bond holdings. Long-term maturities usually offer the highest yield to investors. According to BNY Mellon Advisors, U.S. Treasury bonds returned an average annual yield of 7.09 percent from 1990 to October 2009.
Zero Coupon Bonds. Zero coupon Treasury bonds offer safety to client's rollover account. They're backed by the U.S. government. Developed in 1982, zero coupon T-bonds offer the investor the benefit of zero reinvestment risk. Coupon interest must be reinvested in an retirement plan account to continue to earn money. Money market funds and other low-risk reinvestment alternatives may yield very low returns. Zero coupon Treasury bonds pay no current interest. Instead, the bond accrues interest until maturity. Zero coupon bonds are purchased at a discount and usually mature at 1000 per bond unit, or par. Buying zero coupon bonds along with bonds in various maturity ranges helps to manage interest rate and reinvestment risk.
Deposits. Deposit investments, such as certificates of deposit, offer your client's rollover account a guaranteed return on investment over a known period. Select CDs insured by the Federal Insurance Deposit Corporation for safety. Each account held by an FDIC-member institution is insured for up to $250,000 in early 2011.