Here's the scenario: You are suddenly given access to a mountain (or even just a molehill) of formerly off-limit money. What do you do?

In fact, you've probably faced this situation at least a few times when leaving a job and needing to decide what to do with money from a former work retirement plan (a 401(k) or 403(b), for example).

I know you know the right thing to do. (Hint: Dismiss those visions of a new plasma TV, ASAP.) However, I'm not above hounding you to do the right thing with your old 401(k) money, particularly because cashing out your investments is much more costly than you can imagine.

Fight temptation and inertia
Let's just say that you have your old plan administrator cut you a check. Then you forget to stash the loot in another "qualified retirement" plan within 60 days. Oopsy daisy. Prepare to pay up.

First there are taxes (the money will be considered "income" and taxed at that rate). And then there are the early withdrawal penalties (we're talking 10% right off the top) and fees. Finally, consider how using the money now is robbing from your future.

Hopefully that's enough to convince you to keep the money invested. However, you have another hurdle to overcome: Whether or not to keep the money where it is (in your old employer's plan) or roll it over into another account.

Why you should roll over
Why might you want to move? Let us count the ways:

You may have no choice: Most employer-sponsored retirement plans will force you to take control of your money (via rollover or direct transfer) if you have less than $1,000, for example, in your account. If you meet the minimum account balance requirements, you may be able to leave the money in your 401(k) until the normal retirement age specified by that plan.

You want more investment choices: Most employer-sponsored retirement plans offer a limited number of investment options. When you roll that money into a self-directed IRA (see the links below for directions), your choices open up: You've got the entire market (including mutual fund families, money market funds, and exchange-traded funds) at your disposal. And, by the way, work retirement plans aren't free to participants. Even if they aren't clearly spelled out, administrative fees are baked into the plan. With an IRA at a discount-brokerage firm, all of those fees are spelled out up front. (Things to look for include transfer fees, minimum account balances, administration fees, inactivity fees, and trading commissions.)

You want more leeway in retirement. Uncle Sam has lots of rules for retirees, one of which requires people ages 70 1/2 to begin taking distributions. If your retirement funds are in a 401(k) plan, you are also subject to the distribution rules set forth by the plan administrator. Those tend to be more rigid than those at the companies that manage IRAs. Customer service can also be a factor. Discount brokers tend to act more like banks -- focusing on keeping your business. On the other hand, 401(k)s have a captive audience of company employees and a stream of new business whenever anyone is hired. If it's the investment choices within the plan keeping you there, you'll likely have access to the same ones in an IRA.

You want to move the money into a new employer's plan: Rolling old 401(k) money into a new 401(k) plan is one option, though not all employers permit such transfers. There are advantages (preserving the opportunity to take a loan from the plan) and disadvantages (the investment choices in the plan stink). It all depends on the details of the new plan. (Though if you're champing at the bit to invest in your new plan because your boss offers to match a percentage of your investing dollars, dream on. You won't get matching funds on your transfer.)

When to stay put
Most of the time it's a good idea to take your 401(k) money with you when you leave a job. But there are times when it makes sense to leave the money with your former employer. Consider doing so if:

  • You are satisfied with the investment choices you have in that plan.
  • Your investment costs are lower than you can get elsewhere.
  • Your financial situation is such that you need the bankruptcy protection provided by qualified retirement plans.
  • Your plan allows former employees to borrow against their 401(k) accounts and you know you will do so in the future.

All it takes is a little bit of legwork to move that money from a former work retirement plan into a self-directed IRA.

More details about rolling over:

Dayana Yochim has taught her dog to sit, shake, and stop doing that, but not to roll over. Thankfully her old 401(k)s were already paper-trained and didn't require much coaxing to go where told. The Fool has a disclosure policy.