One of the most important financial decisions you will make when you leave your job is what to do with your 401(k).  Too many people do nothing because they don't know their options or are intimidated by a 401(k) rollover. 

Let's start with some good news: This decision is not complicated. In fact, when you boil it down, there are really only three 401(k) options for you to choose from:

• rollover your funds to a new 401(k)
• rollover your funds to an individual retirement account (IRA) or
• take the money and run (and we can tell you right upfront that that is almost never a good idea!)

So let's figure out which 401(k) rollover option is right for you.

401(k) Rollover Option #1: Roll your existing 401(k) immediately to a new 401(k)

If your new employer offers a 401(k), find out if they will let you roll your existing 401(k) into the new plan immediately.

If they will, simply contact your old company and instruct them to transfer your old 401(k) to your new employer's plan DIRECTLY. This is called a "trustee to trustee transfer," and is the best and safest way to handle the move.

Occasionally, an old employer will mail you the check, instead, made out to the trustee of your new 401(k). Don't panic! Just bring the check to work with you the next working day and hand it in yourself.

But don't dawdle, or it will cost you. If you sit on that check for more than 60 days, the IRS will construe it as your making a withdrawal. This would result in you owing income taxes and getting socked with a 10% early withdrawal penalty if you're under the age of 59-1/2.

401(k) Rollover Option #2: Roll your existing 401(k) temporarily to a conduit IRA

Some employers have a waiting period of six months to a year before new employees may add an existing 401(k) to their plan.

That means Option #1, the plan-to-plan (trustee-to-trustee) transfer that we just talked about, isn't an option for you. Instead, open up a new IRA account at your local bank or a brokerage firm. Then when the waiting period is over, do the same trustee-to-trustee transfer we just talked about.

Do NOT place your old 401(k) in an existing IRA. The IRA must be a new IRA (called a conduit IRA). Once 401(k) money has been commingled with existing (older) IRA money, it cannot be later placed in your new 401(k). Your new employer will not accept it—no exceptions!

401(k) Option #3: Pocket the money

Let us say up front that we almost NEVER recommend this third alternative.

You should only consider it if you are facing severe financial problems such as avoiding foreclosure on your home or filing for bankruptcy. If you really want to be able to retire sometime down the road, your money needs to grow tax-deferred for as long as possible. Pocketing your 401(k) money now will not only potentially set back your future retirement date, it is just downright costly.

Let me show you what I'm talking about: Let's assume you're younger than 59-1/2, you're in a 28% federal tax bracket, you live in a state with a 6% income tax and you have a 401(k) worth $10,000. By the time you pay the 10% penalty ($1,000) for early withdrawal and federal ($2,800) and state ($600) income taxes on the $10,000, you're left with just $5600.

You've just lost 44% of your retirement. Ouch!

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