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On money

401(k) funds may not be available for buying a stock

By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times
published June 9, 2002


Q. I am very interested in a local stock I read about in the newspaper, but I have never invested in stocks before. I have a 401(k) valued at about $2,000, but I don't know how to get this money moved or if I will get taxed past its worth. What do I need to do to move this money into this stock? What are some pros and cons?

A. You cannot invest your 401(k) account in this stock unless your plan offers a brokerage account option. Participants in most plans are restricted to a limited menu of mutual funds and perhaps their own company's stock.

You may be able to take your money out of your 401(k) and put it in a brokerage account. That way you could use the money to buy whatever stocks you liked. As a general rule, this option is available if you are older than 59 1/2, you have become totally disabled or you have left your job. IRS rules allow hardship withdrawals, but it's difficult to qualify.

To defer taxes, you can roll a 401(k) directly to an individual retirement account with a brokerage. If you simply cash in your account, you will owe income taxes on the money plus a 10 percent penalty if you are younger than 59 1/2.

The stock with which you have become enamored is highly speculative. That means you should not invest any money that you cannot afford to lose. Even then, only a small portion of your savings should be in any one stock. One reason small investors favor mutual funds is that a fund will own many stocks, providing automatic diversification.

Q. I want to invest in one of those 529 college savings plans for my 14-year-old grandson, who lives in Minnesota. Do you think it is too late to start a plan for him since he is 14? I have looked at two different plans, one with the state of Minnesota and the other with Vanguard. What would be your recommendation?

A. It is too late to invest aggressively for college, but it is definitely not too late to set up a savings plan. How much are you planning to contribute to the plan? If the amount is less than the cost of one or two years of college, stick with fixed-income investment options for your savings. If you are socking away more than that, you could allocate a small part of the money to stocks.

My bias is to stick with a home-state plan as long as it is at least as good as the alternatives you are considering. The Minnesota plan appears to meet that test. For in-state participants, the Minnesota plan gets a top rating from Savingforcollege.com. The plan is too new to judge its investment results, but the manager, TIAA-CREF, has a good reputation. Expenses are 0.65 percent a year, the same as they are for the Iowa plan managed by Vanguard. One bonus: Minnesota provides matching grants for qualified participants of up to $300 a year.

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Q. I have most of my savings in CDs, some of which are coming due. I recently have seen where GNMA bond funds are providing about 6 percent. I understand that they are government-backed and can be sold any time without penalty, unlike CDs. Is this so? It would seem that by buying a bond fund, if CD rates increase, then I could switch back to CDs. Is there something I am missing?

A. I'm afraid so. If interest rates increase, your bond fund's shares will decline in value. Although you will be able to sell the shares without penalty, you will get back less than you paid.

The GNMA bonds you are referring to are mortgage-backed securities. Payments to investors come from the principal and interest payments made by homeowners. That creates the potential for another interesting phenomenon: When mortgage rates decline, homeowners tend to refinance, which means GNMA investors may get their principal back more quickly than they expected. This money then has to be reinvested, probably at lower rates.

Online money map

The Securities and Exchange Commission is giving investors same-day access to new corporate filings through the SEC's Edgar database. In the past, documents were not posted for 24 hours.

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-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

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