Much of what you can and cannot do with retirement plan assets is governed by tax laws written by Congress and interpretations by the IRS and the U.S. federal court system. Understanding these rules and keeping up-to-date on these changes will help you ensure that your retirement account is operating within regulatory guidelines. In this article, we review some rules that are likely to affect your retirement account.

Tutorial: Retirement Planning

Cash-Out Rules
Some qualified plans include a provision that allows the plan to distribute your vested balance without your consent if the balance is less than $5,000. This is referred to as an involuntary cash-out.

The rules for involuntary cash-outs changed in 2005, and become effective for plan years that end after March 28, 2005. These rules now require plan administrators to roll over your involuntary cash-out amounts between $1,000 and $5,000. This means that the plan administrator can no longer distribute amounts within this range to you. Instead, the administrator must establish a Traditional IRA to which the amount must be rolled over. If the plan administrator does not want to establish an IRA for participants affected by the rules, the administrator must amend the qualified plan by reducing the involuntary cash-out amount to no more than $1,000. Under this option, the plan administrator cannot distribute your balance if the amount is over $1,000. Some plan administrators may even choose to reduce the cash-out amount to zero, thereby eliminating the cash-out provision from the plan.

A Note on What's Counted as the Vested Account Balance
When determining your vested account balance for the purpose of the cash-out rules, the plan administrator may disregard amounts you rolled over from another retirement plan. This means that the cash-out amount can be more than $5,000. For instance, say you rolled over $50,000 from a 401(k) plan you maintained with a former employer to your current 401(k) account, whose balance is now $53,500. This entire amount may be cashed out because the amount accrued under the current plan is less than $5,000.

Be sure to check with your plan administrator to determine whether any cash-out rules apply to your plan balance, and if so, take steps to ensure that the assets are distributed in accordance with your instructions. This will help to ensure that you keep track of your assets. (For further reading, see Keeping Track of Your Assets.)

Roth 401(k) Plans
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which became effective for tax years beginning January 1, 2002, includes a provision that allows employers to add a Roth program to a 401(k) or 403(b) plan. This provision became effective January 1, 2006.

Under the Roth 401(k) or Roth 403(b) program, plan participants are allowed to make Roth contributions to their 401(k) plans or 403(b) accounts on an after-tax basis. Earnings on these contributions accrue on a tax-deferred basis, and are tax free if qualified.

The contribution limit to the Roth 401(k) and Roth 403(b) accounts is subject to the same limit as regular 401(k) and 403(b) salary deferrals. For instance, amounts contributed for 2013 cannot be more than $17,500, plus an additional $5,500 catch-up contribution for individuals who reach age 50 by the end of the 2013 calendar year. (For more on Roth 401(k) plans, see An Introduction to the Roth 401(k).)

Heroes Earned Retirement Opportunities (HERO) Act
Generally, combat-zone compensation earned by members of the Armed Forces is not considered compensation that is eligible for making an IRA contribution because these amounts are not taxable income. The HERO Act redefined these amounts as compensation that counts in determining eligibility to contribute to an IRA. (For further reading, see Benefits for Members of the Armed Forces.)

Conclusion
Keeping on top of these changes will help you ensure that your retirement assets are managed in accordance with any new rules. Failing to do so could result not only in penalties and loss of the tax-deferred status of assets, but also missed opportunities and therefore loss of important benefits. For instance, EGTRRA increased the amounts that can be contributed to an IRA each year. Individuals who are not aware of this provision may not be able to benefit by contributing larger amounts to their IRAs. (For more, check out Top 10 Tips For A Financially Safe Retirement.)

Related Articles
  1. Term

    How Traditional IRAs Work

    A traditional IRA is a tax-advantaged retirement account that includes stocks, bonds, mutual funds and other investments.
  2. Retirement

    5 Reasons Millennials Lead in Saving for Retirement

    Say what you want to about millennials but the one thing they are doing better than any other generation is saving for retirement. Here's why.
  3. Retirement

    Shopping the New Retirement Products

    There are more options than ever for retirement portfolios these days. Choosing the right product comes down to your needs, time and management style.
  4. Mutual Funds & ETFs

    Top 3 PIMCO Funds for Retirement Diversification in 2016

    Explore analyses of the top three PIMCO funds for 2016 and learn how these funds can be used to create a diversified retirement portfolio.
  5. Retirement

    How Much Should You Have In Your 401(k) To Retire?

    Determining how much money should be in your 401(k) when you retire depends on several variables, many of which are uncertain.
  6. Retirement

    Retiring in Thailand: The Pros & Cons

    It's a lovely land, but before relocating, get the skinny on this Southeast Asian kingdom.
  7. Investing

    How To Make Sure Your Healthcare Costs Do Not Ruin Your Retirement

    The best proactive plan of action for a stable retirement is to understand medical costs, plan ahead, invest properly, and consider supplemental insurance.
  8. Retirement

    Is Retiring in France Safe Today?

    After a series of deadly terrorist incidents, some may be asking themselves this question.
  9. Investing

    3 Small Steps to Maximize Your Investing Goals

    Instead of starting the New Year with ambitious resolutions, why not taking smaller manageable steps that can have a real impact.
  10. Investing

    7 Creative Ways to Save for an Early Retirement

    Take note of these out of the box steps you can take towards securing yourself an earlier, more comfortable retirement.
RELATED FAQS
  1. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  2. What is the maximum I can receive from my Social Security retirement benefit?

    The maximum monthly Social Security benefit payment for a person retiring in 2016 at full retirement age is $2,639. However, ... Read Full Answer >>
  3. Are target-date retirement funds good investments?

    The main benefit of target-date retirement funds is convenience. If you really don't want to bother with your retirement ... Read Full Answer >>
  4. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  5. Will quitting your job hurt your 401(k)?

    Quitting a job doesn't have to impact a 401(k) balance negatively. In fact, it may actually help in the long run. When leaving ... Read Full Answer >>
  6. How does my spousal Social Security benefit work?

    If you have never worked or paid Social Security taxes, you will not be eligible to receive Social Security retirement benefits ... Read Full Answer >>
Trading Center