Traditional pensions used to be much more common, but recently, they've largely given way to defined contribution plans like 401(k)s. Nevertheless, the rules for rolling over pension plan balances are equally important to both in order to make sure that you don't create a huge amount of unnecessary tax liability. Here, we'll cover more about the pension rollover rules and the options you have in dealing with your workplace pension plan. That way, you can figure out which one makes the most sense for you from a financial and tax perspective.

What the pension rollover rules say
IRS Publication 575 defines the pension rollover rules that workers have to follow when they decide to roll over their pension balances. The rules apply to qualified retirement plans, which include not only traditional pensions but also 401(k) plans and similar retirement accounts.

The most important general rule is that if you take a lump-sum distribution from a retirement plan, then you can roll it over into another qualified retirement plan or a traditional IRA and defer any taxable income. Normally, a lump-sum distribution from a pension would be taxable in the year in which you take the distribution. By rolling it over, you can avoid that tax, and the rules for whichever type of account you use to roll the money into will apply going forward.

There are two ways to make the rollover happen. The easier is the direct rollover, where money is transferred directly to the receiving retirement plan or IRA. If you choose this option, then you won't have any money withheld for taxes, as the IRS will know that you've chosen a rollover.

You also have the option to have money paid to you. You then have 60 days to redeposit the money in a retirement plan account or IRA. In this case, your employer will usually withhold 20% of the distribution for income tax, meaning that you'll have to come up with that 20% from another source within the 60-day period to complete the rollover in full.

Some special pension rollover rules
In addition to the basic rollover rules, some other situations call for specialized treatment. For instance, if you receive property other than cash in a lump-sum distribution, such as stock, then you must either roll over that property in kind or sell it and roll over the cash proceeds. You're specifically not allowed to retain the property and roll over an equivalent amount of cash.

If your pension or 401(k) includes after-tax contributions, such as a designated Roth account, then you're allowed to roll over the after-tax portion to a Roth IRA or to a similar designated Roth account in another employer retirement plan. You're also allowed to roll over pre-tax money directly to a Roth IRA, and if you do, it will be treated as a Roth conversion, with the money treated as taxable income in the year of the distribution but with future income and gains getting the tax-free treatment that Roth IRAs offer. (For more about IRAs -- both Roth and IRA -- and the benefits they can offer, visit our IRA Center. We'll help you sort things out and guide you toward your best options.)

Finally, past rules that required segregation of retirement assets have gotten a lot more lenient. There are some situations in which keeping rolled-over assets in a different account from other assets might be helpful, but the requirements to do so aren't nearly as strict as in the past.

Rolling over a pension can be a smart way to minimize tax. Just make sure you follow the pension rollover rules to get the full tax benefits that you deserve.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at knowledgecenter@fool.com. Thanks -- and Fool on!