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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information