Do you have a "Zombie Plan" roaming around somewhere in your financial past? An old 401(k), 403(b), or other employer sponsored plan that's been neglected and untouched for so long that it's almost left for dead!
What you decide to do with your old "Zombie Plan" is really important regardless of whether you're still working, have changed employers, or are approaching retirement.
Your employer sponsored retirement plan is typically your most valuable retirement asset, and how you handle it could have major implications for you now and in retirement.
Today we're going to answer some important questions that you may have regarding your options for dealing with your "Zombie Plan". Most importantly we want to help you avoid a surprise tax bill or IRS penalties.
There are 5 basic options for handling old employer plans:
OPTION #1: Don't do anything.
- If you own company stock you may qualify for a special tax break called Net Unrealized Appreciation.
- You may have access to plan loans.
- You may qualify for federal creditor protection.
- You may end up of with a trail of these old "zombie" accounts as you move from one employer to another.
- Plan fees may increase without your knowledge.
- You may have limited withdrawal options.
- Investment options are limited to what is currently offered in the plan.
- Your investments may not be optimized for taxes or your personal goals, risk tolerance, etc.
- NEXT STEPS: Contact your previous plan administrator and ask if it's possible to leave your plan in place.
OPTION #2: Move it to your new employer.
- You will have all of your employer plans in one place.
- You won't pay taxes on the distribution if you transfer it directly.
- You will be limited to the investment options available in the new plan.
- Many employers wait to become eligible before you can enroll in the new plan.
- NEXT STEPS: Contact HR at your new employer and ask for information on how to rollover your balance from the former plan.
OPTION #3: Cash it out (PS Possibly the worst option due to financial repercussions!)
- You will have the cash in hand
- You will owe income taxes on the account value
- The plan administrator may automatically deduct 20% for taxes.
- You will owe a penalty to the IRS if you are under 59 1/2.
- This could set you back from accomplishing your long-term goals.
- NEXT STEPS: Contact your previous plan administrator and tell them you want to liquidate your account.
Moving your old plan into an IRA give you more control over your retirement assets - there are two basic ways to do this.
OPTION #4: 60-Day Rollover - You will request a check from the old plan and then you have 60 days to roll it over into an IRA.
- You will have immediate access to the cash for 60 days. Once you complete the rollover you will have the benefits of an IRA. See Option #5 below for more info
- You will have to handle the check yourself and be sure to deposit it into the IRA within 60 days.
- The 60-day or Indirect Rollover is reported to the IRS.
- if you do not roll the funds into an IRA within 60 days you will owe taxes and possibly penalties.
- You risk losing out on market gains that occur within the 60 day period.
- Your employer may automatically withhold 20% for taxes.
- You can only complete one indirect rollover every year.
- See Option #5 below for IRA specific cons.
- NEXT STEPS: Contact your previous plan administrator and ask them to send you a check. You will have 60 days to have the funds deposited into an IRA account.
OPTION #5: Direct Rollover to an IRA - Also called a Trustee to Trustee transfer.
- You will get the benefits of an IRA including:
- Access to many investment options
- Tax optimizations strategies such as Roth conversion, Back-door IRA's, etc.
- You will avoid all potential IRS penalties and taxes.
- Your employer won't withhold any amount from the balance for taxes.
- You will get the benefits of an IRA including:
- You will have to open an IRA if you don't already have one - We can help with this!
- You new IRA could have higher fees than the old plan. We can help you evaluate them.
- Some retirement plans allow penalty-free withdrawals after age 55. Typically you can't withdraw from an IRA until age
- Once you reach age 72 you will need to take Required Minimum Distributions from both employer plans and IRAs. But, if you keep working past age 72 you are generally exempt from this if your assets are still in the employer plan.
- NEXT STEPS: Contact your previous plan administrator and tell them you want to complete a direct rollover. They will give you next steps. We can help you complete any forms that you receive.
Overwhelmed? You've worked hard to build up your retirement assets and you deserve to see your savings grow in a tax-efficient manner. Making mistakes with your old "Zombie Plans" can be costly, but avoidable if you know what to do. However, the biggest mistake of all is to do nothing.
You don't need to work through all of these options alone. We can show you how to:
- Avoid accidentally violating IRS rules
- Avoid making your retirement funds permanently taxable.
- Avoid triggering a taxable event
- Understand the rules of your plan.
- Tax advantage of every IRS benefit to maximize your growth.
- Make sure your assets are invested with your goals, risk tolerance, and investment preferences.
- Optimize your account for tax efficiency.