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Dr. Don Taylor, CFA, advice columnistMoving 401(k) account from former job

Dear Dr. Don,
I have a 401(k) plan offered from my previous employer. In August of 2006 I left that job and started a new job. At the current job I'm not eligible to participate in its 401(k) plan until I have been employed for one year. Even though I left my previous employer, my 401(k) account is still managed by that plan adviser but I don't receive any employer match -- only the earnings from where the money is invested.

Am I better off keeping the 401(k) where it is for now and then transfer to the new plan with my current employer when I'm eligible or should I look into transferring those funds into other tax-free investments like a Roth IRA, etc.? What other options besides a Roth IRA do I have?
-- David Departure

Dear David,
Short of cashing out, which is almost always the wrong answer, you have three choices when deciding what to do with your 401(k) account held in your previous employer's plan. You can keep it there, transfer it into an IRA rollover account or transfer it into your new employer's 401(k) plan.

A direct rollover into a Roth IRA account isn't possible until the 2008 tax year, although you could do a rollover into a traditional IRA and then convert to a Roth IRA if eligible to do so. Tax-deferred contributions in a traditional IRA account are taxable when transferred into a Roth IRA. Talk to your tax adviser about taking this step.

If your 401(k) account with your previous employer has any company stock in the account you'll want to get professional tax advice to manage any net unrealized appreciation, or NUA, in the company stock holdings.

Aside from the tax-deferred/tax-advantaged account decision and NUA implications, your decision about a new home for your retirement money should be based on investment choices, account fees and expenses. In general you have more investment choices and are better able to manage fees and expenses with a traditional IRA or Roth IRA account then you do with a company-sponsored 401(k) plan.

This recent Dr. Don column, "Avoiding withholding on rollovers," explains how to do a direct transfer and avoid mandatory withholding in moving the money to a rollover account.

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: April 11, 2007
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