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I don't frequent this board, and a search came up empty, my apologies if this has been covered.

I participated in my employer's 401k for the first 5 months of the year. On June 3rd, I took a new job. I'm not eligible for participation in the new employer's 401k until January 1st.

What's my best option for the interim 7 months? I'm 55 and I would like to continue to fund my retirement and take advantage of any tax deferrals possible but perhaps I'm out of luck until 2014? I have an existing rollover IRA (to which I do not/cannot contribute*) and my Roth IRA is already fully funded.

Any options better than funding a taxable account until I'm eligible for the new 401k? Thanks in advance.


*on a tax deferred basis
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If you have maxed your Roth IRA contributions for the year, you cannot contribute additional cash to a traditional IRA. The limit is the sum of contributions to both.

You can rollover the funds in your previous 401K to an IRA, and it can be your existing rollover IRA. I don't understand your tax deferred comment. Rollover IRA transfers from 401ks do not count as contributions and are not included in your annual contribution limit.

Yes, if you have funds to save, investing in a taxable account in the long term buy and hold (LTBH) style is the best you can do. You pay taxes only when you sell and then at capital gains rates. And note that index funds are an excellent vehicle for this. They pay dividends, but those too are taxed at capital gains rates.
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You've identified a problem in the industry. The law allows plan sponsors to require up to one year of service (or less if they so choose) - and in some case, 2 years. The problem comes in when people, like you, change jobs (which they do an average of 8 times in their lifetime - possibly resulting in 8 years "less" participation in retirement plans).

The trend in the industry clearly has been to shorten eligibility requirements - or eliminating them altogether - except perhaps in "high turnover" companies. While a long shot - talk to you employer and see if they've considered (or would consider) eliminating the eligibility period. If it can be changed yet this year, you could slam contributions into the plan for the rest of the year.
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Some companies allow participation in 401k, etc., right away, or after 30 days. The caveat being any matching company funds do not vest until after 2+ years.

This at least allows you to invest your own money and if you leave before the vesting period, that's all you get, your money... none of any matching funds. Therefore there is no cost (other than administration) for the company.
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LakeEffect,

You wrote, Any options better than funding a taxable account until I'm eligible for the new 401k? Thanks in advance.

No, but you have my sympathy. I just went through something similar.

In 2010 I changed contracting firms. The new firm basically didn't have a 401k (long story). I didn't have the details, but knew their plan was going to be a problem so I immediately changed my election at my then-current job and shoved 80% of my pay from my then-current gig into that firm's plan ... even though it likely alerted them of my imminent departure. (At least they weren't surprised when I resigned.)

Anticipating a long period without a 401k, I began regular investment in a set of Vanguard funds - mostly their S&P 500 fund - around the end of 2010.

In August of 2012 I was approached by a major company about a full-time position. I started at the end of September and in October began funneling half my paycheck into their 401k in the hopes of catching up.

It was a little scary juggling the cash flows (or lack thereof); but being nearly 50 and having no way to contribute to any tax-advantaged retirement account was just as bad. I count myself lucky to have had the option, the means to exercise it for 2010* and 2012* and that I only really missed out on 2011. Missing a year where I'm eligible for catch-up contributions would really suck.

* I was within a couple grand for 2010 and about $200 for 2012.

- Joel
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Thanks for all the replies, you've all confirmed what I already suspected -- invest after taxes until I'm eligible for the new 401k. Not a big deal, I just wondered if there was a clever alternative -- it appears there is not.

Paul, to clarify, my rollover IRA is the sum of several previous 401k's I've had and then rolled over into a self-directed account. (I'm an engineer and we change jobs more frequently than most folks). So I will roll over my existing 401k into this fund, but I do not put new money into this fund.

Joel, that's a very clever idea. If one knows they will be changing jobs, one could pile on the contributions in the existing 401k to compensate for the gap in eligibility later on. I'm going to file that idea away for future reference :)
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Joel, that's a very clever idea. If one knows they will be changing jobs, one could pile on the contributions in the existing 401k to compensate for the gap in eligibility later on. I'm going to file that idea away for future reference :)

You can also play this game if you have two employers with 401k plans. Max both of them part year and then adjust if you need to to keep below the max.

Not sure about Roth 401ks, but for regular 401k's usually there is a higher after tax limit in addition to the pretax limit. So you may very well want to do the pretax and after tax limit for the part year. But most employers allocate funds with each paycheck or once per month. I don't think you can back allocate. Some will let you specify how much pretax you want to contribute each pay check and then automatically stop collecting when you reach the max allowed per year. That is probably your best course if allowed by your plan.
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pauleckler,

You wrote, Not sure about Roth 401ks, but for regular 401k's usually there is a higher after tax limit in addition to the pretax limit. So you may very well want to do the pretax and after tax limit for the part year. But most employers allocate funds with each paycheck or once per month. I don't think you can back allocate. Some will let you specify how much pretax you want to contribute each pay check and then automatically stop collecting when you reach the max allowed per year. That is probably your best course if allowed by your plan.

I'm not sure what you're trying to describe here. The federal contribution limits ($17,500 in 2013) on 401k plans are the same whether the contributions are pre-tax or post-tax. The contribution limit is the combined value of all contributions for the fiscal year.

The post-tax contribution limit effectively lets you contribute more by letting you max out, pay the taxes now and avoid paying any more taxes in the future. If you're contributing $17,500 and are in the 25% tax bracket, you effectively contribute the equivalent of $21,875 in pre-tax money.

Of course it's probably a bad idea to put everything into Roth accounts. And some people have to contribute to a pre-tax 401k just to be eligible for a Roth IRA contribution.

- Joel
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The federal contribution limits ($17,500 in 2013) on 401k plans are the same whether the contributions are pre-tax or post-tax.

That is quite a change from the days when I participated in 401ks. Back the combined max was always much higher, often $10K more.
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pauleckler,

I wrote, The federal contribution limits ($17,500 in 2013) on 401k plans are the same whether the contributions are pre-tax or post-tax.

To which you replied, That is quite a change from the days when I participated in 401ks. Back the combined max was always much higher, often $10K more.

I think you may be confusing some numbers. I believe there is some limit to how much that can be contributed in total and it also depends on whether we are talking deductible contributions or not. For instance, the maximum that can be contributed in total to a defined contribution plan for 2013 is $51,000. If you're self-employed, you can hit this by contributing an amount (from gross income) equal to up to 25% of the compensation you pay yourself.

Suppose your contracting business makes $100K in a year and it is all profit (from labor). You could pay yourself $80K in compensation and contribute $20K to your 401k as the employer. Then as an employee you can contribute an additional $17,500 - $23,000 if you are eligible for catch-up contributions. That would let you defer taxes on up to $45,000/year or 45% of your gross. However, the combined contributions would get capped out at $51,000 in 2013 if you made more.

There are lots of other numbers that affect who can ultimately contribute what. I suspect most people are constrained by the basic numbers discussed this board. The changes to the 2013 numbers are listed on the IRS website at http://www.irs.gov/uac/2013-Pension-Plan-Limitations

- Joel
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I'm not sure what you're trying to describe here. The federal contribution limits ($17,500 in 2013) on 401k plans are the same whether the contributions are pre-tax or post-tax. The contribution limit is the combined value of all contributions for the fiscal year.

Not true, the combined $17,500 limit is for pre-tax and ROTH contributions. Non-ROTH after tax contributions have a different limit.
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