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Dr. Don Taylor, CFA, advice columnistNew job and old 401(k)

Dear Dr. Don,
I left my last job with $6,000 vested in the company's 401(k) plan. My new job also has a 401(k) and my employer contributes 7 percent of my salary to it each year. I don't like the choices of mutual funds in the new 401(k). Can I take the $6,000 from the last job and open an IRA to roll it over into?
-- Jeff Job

Dear Jeff,
You have three choices as to what to do with the 401(k) money held with your previous employer but you've already nixed one of them, namely to move the money to your new employer's plan.

You could decide to leave the money with your previous employer. That works if you like the investment options and the annual fees and expenses associated with the plan and your investments.

Finally, you can decide to roll the money into a traditional IRA. This option gives you the most flexibility as to how the money is invested and the fees and expenses levied on the account and investments. You could put the money in CDs with a bank, open a brokerage account and invest in stocks, bonds or mutual funds, or deal directly with a mutual fund company.

If you're interested in a Roth IRA, you may have the ability to roll the money into a traditional IRA and then move it into a Roth IRA. Moving the money into a Roth IRA account will be a taxable event, but distributions out of the account are tax-free in retirement.

In 2008 you'll be able to roll directly from the 401(k) into the Roth IRA without the intermediate step of rolling the money into the traditional IRA, but since it's a fairly straightforward process even with that extra step, there's no real reason to wait for 2008 if you decide on the Roth. Talk to your tax adviser before moving the money into a Roth.

You'll also want to talk to your tax adviser if any of the $6,000 is in company stock. Favorable tax treatment of any net unrealized appreciation, or NUA, on the stock can make it beneficial to transfer the stock to a taxable brokerage account while transferring other money to the IRA account. It's easy to get this wrong, so you really do need professional tax advice in this situation.

If you don't like your investment options in the 401(k) plan, then lobby your plan's trustees for more or better choices. The plan providers have a fiduciary duty to the plan participants to provide appropriate investment choices.

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: Jan. 15, 2007
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