Before You Quit Your Job, Know the Rules for Rolling Over Retirement Savings

Along with stringent rules for rollovers, access and information are big issues for many working retirement-savers. Here are some things that workers should know about IRA or 401(k) account rollovers.

Mar 8, 2014 at 1:05PM

Most Americans are generally familiar with the idea of planning for retirement, whether it's through an employer-backed 401(k), a private IRA, or some other investment vehicle. But not all of those who toil away building a 401(k) or other account understand what's going to happen to it if they leave the company.

In talking about the big changes made to pension and retirement plans in the last couple of decades, one thing analysts are stressing is that people tend to have a lot more job volatility than they used to. In other words, more of us will change jobs several times in the course of a career. That's part of what has led to the disappearance of the "three-legged stool" that was often advised for workers lucky enough to have a pension, private funds, and Social Security credits. But it's also an issue that will create a lot of confusion, because although people may agree to save for retirement in an employer plan, they may not have a clue what to do with that money if they decide to quit.

Basic choices
Workers who are leaving a company can take their retirement money with them, either moving it into a new employer-provided or private retirement plan or simply taking the money outright. The important thing here is that most financial planners would agree that the latter choice is not generally a good one: In cashing out retirement funds previously earmarked as tax-advantaged, employees have to pay tax on those funds at their regular tax rate and can pay another 10% in early-withdrawal penalties.

Protocols for rollovers and retirement plan changes
Here's the thing: Companies often dump checks on departing workers by default, without appropriate instructions that clarify these choices. Although some employers will allow retirement money to be held in their own plans after an employee leaves, account holders may not be aware of this choice.

There's also a timeline for rollovers that typically applies to the money. Traditionally, individuals have 60 days to get funds from their old employer and roll them into a new IRA or 401(k). But some of these timelines can have to do with company policy as well. For instance, it can be tricky getting the actual checks from human resources or payroll departments -- and that's where workers who are moving from one job to another, or taking time off as a stay-at-home parent, have to be savvy about what happens to their retirement money and proactive about this issue upfront, rather than waiting for the default to occur.

New options for younger workers
Other recent changes in retirement rules include a new option for workers to roll over existing 401(k) funds into what are called Roth accounts. A traditional retirement fund is deposited tax-free and taxed when it is taken out -- i.e., at retirement. A Roth account involves taxes being taken out, with the remainder deposited to be grown tax-free. Although Roth accounts aren't popular with many workers because contributions seem to have big chunks taken out of them, more financial advisors are now showing why it may be a good idea to pay these taxes upfront. Look for new opportunities to use a Roth IRA to enhance your own retirement plan, whether you're attached to one employer or moving from one to another.

Yet you also have to follow the rules. Such rollovers must be done directly from the original 401(k) to the new Roth IRA in order to be done correctly. The IRS is working with employers to help them to allow these kinds of options and to extend deadlines for Roth contributions.

These types of details are key to helping career professionals grow capital for their retirement. It's pretty commonly known that there's a retirement crisis in America and that too many of us do not have sufficient funds invested to provide for ourselves in our golden years. Understanding items like the uses of a traditional or Roth IRA, and rules for converting retirement money between employers, can help an individual save up a lot more money over the course of his or her lifetime, to provide for a family's finances over the long term.

Learn to Make Your Money Work for You
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Justin Stoltzfus is a contributor to WiserAdvisor.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers