An equity fund, also known as a stock mutual fund, contains a basket of stocks from domestic and international companies. Investors will purchase shares of a stock mutual fund to provide them with a balanced exposure to stocks in a general index or a specific market sector. These funds differ from other types of mutual funds that may contain bonds, money market instruments and other types of securities. Investors who are vested in a stock mutual fund through a retirement plan can choose to roll over funds or their holdings into a new investment vehicle.
Rollover refers to the reinvestment of proceeds from current mutual fund holdings into a new equity fund or an annuity plan. If investors cannot directly transfer their shares to a new investment vehicle, they can liquidate their current holdings and reinvest rolled-over funds into the same stock mutual fund or a similar fund. Investors can also roll over dividends to purchase additional shares of equity funds after paying tax on their earnings.
401(k) plans allow investors to save for retirement through tax-deferred contributions to an employer-sponsored retirement plan. If an investor holds shares in an equity fund, he can roll them over from a 401(k) plan to an individual retirement account (IRA) or from an IRA to another IRA. When rolling over shares into an IRA, he will pay a 10-percent early-withdrawal penalty if under the age of 59 and a half, unless he transfers funds within 60 days of withdrawal.
An annuity acts as an insurance contract that provides investors who retire or become disabled with a monthly paycheck. An investor who desires a steady stream of cash upon retirement without the risks of investing in the stock market may choose to invest in this vehicle. He will have to liquidate current mutual fund holdings and roll these funds over into either a fixed or variable annuity. Investors will not pay a tax penalty when they roll over funds. Annuities can take fixed- or variable-payment form. With variable annuities, an investor can place premiums into mutual funds selected by the insurance company that allow him to receive higher returns than a fixed annuity.
Investors may want to keep their shares in their current investment vehicles, because rollovers can trigger federal and state tax liabilities. The Internal Revenue Service (IRS) does not tax earnings until investors cash in their mutual fund shares. Investors should always roll over shares or funds to another tax-deferred investment vehicle to avoid penalties and early tax. Even if an investor chooses an equity fund rollover, the IRS will require his plan manager to withhold 20 percent of the proceeds, requiring him to liquidate part of his holdings unless he has his plan manager directly transfer assets to the new plan.