If you have been lucky enough to have an employer-sponsored retirement plan, such as a 401(k) plan, you will have to make a decision as to what to do with the fund when you leave your job. If you quit or are let go from a company, you basically have three choices of what to do with the money in your retirement account.

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• Roll the money over into a new retirement account
• Cash it out as a lump sum distribution
• Leave the money where it is

What you decide to do with your retirement plan when you leave your job should be based on your situation and you should hopefully take into consideration the financial consequences and rewards presented by each option.

Here is what you should know about each of the options:

Retirement Plan Roll Overs

If you are changing employers you can move your money into the new employer’s 401(k) plan or into a rollover IRA. If you are going to move your retirement funds, you want to use a trustee-to-trustee transfer so that you never physically have your hands on the money and helps you avoid any fees associated with receiving the money yourself and having to deposit it into the new account.

Your previous employer will keep 20% of your retirement fund when you request a trustee-to-trustee transfer. You will get this money back when you file your income taxes next time around, but in the meantime, you have to come up with the money within 60 days of transferring the retirement funds or else the IRS will charge income taxes on the money and a 10% early withdrawal penalty fee.

If you haven’t lined up another job yet, or your new employer doesn’t have a 401(k) plan, you can move your money into a rollover IRA to enjoy tax-deferred growth. With a rollover IRA, you have more options than an employer-sponsored 401k plan too – as far as how you invest and allocate your money. You might choose stocks, bonds or mutual funds, for example.

Cashing Out Your Retirement Plan

When you leave an employer, you have the option of cashing out the retirement plan and receiving the money. Because the money isn’t being used for retirement, the federal government will charge a 10% early withdrawal penalty in addition to paying income taxes on the money you receive.

As if that isn’t enough, the government is also going to take 20% of your retirement fund withdrawal as an advance on your taxes. It is rarely a good idea to cash out your retirement plan when you lose your job, quit, or change employers. You may be in a financially tight situation in between jobs, but its not worth it to cash out. Consider your other options first, to avoid losing so much money through fees and taxes.

Leave the Money Where it is

If you have at least $5,000 in your retirement account, you can actually leave your money in the account even when you leave the job. You cannot add more money to your retirement account held with a previous employer, but the money in the retirement account will continue to grow until you are ready to start taking retirement distributions. If you decide to leave your money in the account, just keep very good records regarding where it is so you don’t forget about it when you reach retirement!