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Dr. Don Taylor, CFA, advice columnistChanging jobs changes retirement plan

Dear Dr. Don,
I've accepted a new job that pays $70,000. The new firm has a 401(k) plan but they do not match the first year's contribution. At my current job, I'm contributing 13 percent and would like to increase it to 15 percent. Since there is no match in the first year, I'm trying to decide if I should participate in the new company's 401(k) or wait until next year, since I have at least 35 years to go before I retire. 

If I wait until my second year to participate in the 401(k) plan, the only options I know about for this year are a traditional IRA, Roth IRA or an emergency fund. I do not have an emergency fund and would love to build one quickly, but I also would like to continue with my 401(k) participation. I currently I have $37,000 socked away. What do you advise?
-- K. Cache

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Dear K.,
Your ability to deduct contributions to a traditional IRA account is limited if you are eligible to contribute to your employer's retirement plan, although you have the ability to make nondeductible contributions to the IRA account. Roth IRA eligibility is based on income levels. 

IRS Publication 590, Individual Retirement Arrangements, provides guidance and work sheets, or you can contact your tax professional if you're uncertain about your ability to make deductible contributions to a Roth or traditional IRA account.

An emergency fund is normally invested in short-term money market investments, like a money market account with a bank or a money market mutual fund. A Bankrate feature, "Building an emergency fund," explains in greater depth how to size and invest the fund.

If you're 35 years from retirement and have already put aside 13 percent of salary this year in the 401(k) plan of your current employer, I think it's a better idea to spend the balance of this year building an emergency fund. When your new firm starts matching your 401(k) contributions you should, at a minimum, contribute up to the limit of the match. The decision on where to go from there depends on whether a Roth IRA makes sense for you for any additional retirement savings.

When you switch jobs you'll have some options as to whether you want to keep the money where it is, roll the money from the old 401(k) into the new employer's plan or put it in an IRA rollover account. If the old 401(k) plan has company stock in the plan you'll definitely want to work through the net unrealized appreciation issues with a tax professional before deciding what to do with the old plan. An earlier Dr. Don column, "Risk of rolling over 401(k) with company stock," has more on that issue.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "financing a home," "saving & investing" or "money."'s corrections policy -- Posted: Aug. 16, 2006
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