Published January 23, 2013
Dear Dr. Don,
I just started a new job, and I'm wondering what I should do with my old 401(k) plan from my previous employer. My new employer also offers a 401(k) plan. Can I still continue to contribute to my old 401(k) plan? What are my contribution limitations?
-- Dan Deduction
Dear Dan, You can't keep contributing to your former employer's 401(k) plan. Those contributions were deferred income and, since the employer isn't paying you anymore, you don't have anything to contribute.
Assuming you don't want to cash out, you have three basic choices with your old 401(k) plan account. You can keep it invested with your former employer, move it into your current employer's 401(k) plan (if that plan allows it), or roll it over into a traditional or Roth individual retirement account. I think the decision should be based on the investment choices that are available to you, the account fees and the expenses. Also, if you're moving the money, try a direct (or trustee-to-trustee) transfer so the funds won't be subject to mandatory withholding.
You could consider rolling the money into a Roth IRA from your former employer's 401(k) plan. You would owe income tax on the conversion, but qualified distributions out of the account would be tax-free. Roth IRA conversions make sense if you can pay the taxes from investments or savings accounts that aren't tax-advantaged, and you expect to be in a higher tax bracket when you retire. Talk with your tax professional if you're not certain if this is the case for you.
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