What to do with your 401(k)? Think about when you want your money.

You retired. Or changed jobs – maybe several times. So did I. And at many of those jobs, we had a 401(k) or some other type of retirement plan. If your account held less than $5000, you may have been forced to make a quick decision about what to do with the money. Otherwise, you probably did what many of us do so well: procrastinate.

Maybe now is a good time to evaluate your options and make a decision.

There are as many as four things you could do with the money:

  1. Leave the money where it is. (And actually make a decision that it's the best thing to do, not just leaving it there because you don't know what to do.)
  2. Roll the money into an IRA.
  3. Transfer the money into your new employer's plan.
  4. Take the money out.

Which is best? The answer depends on two things: your personal situation, and the features of your plan(s). Answering several questions will help point you in the right direction. Keep score to help you decide.

Today, we'll concentrate on when you'll need access to your money. I'll deal with comparing costs, investments, and services in my next post on Monday.

Note: Some of these questions are about taking money out before retirement age. Your goal should be to preserve your assets for retirement, but if you know you'll need money before then, you should factor that into your decision.

Were you at least age 55 when you left your job, and will you need to take money out before age 59½? There is usually a 10% early distribution penalty, in addition to regular income tax, if you take money out of a retirement plan before age 59 ½. But there are exceptions to the penalty. If you were at least age 55 when you "separated from service," you can take money from that employer's plan without penalty. But if you move the money to an IRA or your new job, you've lost that opportunity. Score: Former employer's plan.

Are you under age 59½, and do you plan to use part of the money for higher education expenses or to help purchase a first home? If you'll be paying either of those expenses for yourself, your spouse, children or grandchildren, you can avoid the 10% early distribution penalty if your take money from an IRA, but not if the money comes from an employer plan. Score: IRA.

Are you over age 70½ and still working, or do you expect to work beyond that age? And do you want to delay taking money from your retirement accounts? You must start taking Required Minimum Distributions from your retirement plans when you reach age 70 ½ - unless it is your current employer's plan. Score: Current employer plan.

Do you want to avoid Required Minimum Distributions, whether you're working or not? A Roth IRA is unique: it is the only retirement plan that does not require RMDs for the original account owner, or a sole-beneficiary spouse who either renames the account in her own name, or who treats the account as her own. To avoid RMDs, you can transfer money from a designated Roth account in your employer plan directly to a Roth IRA. You can also transfer money from a traditional (tax-deferred) employer plan or IRA to a Roth IRA, but you'll have to pay tax on the full amount. Score: Roth IRA.

What are the distribution options for beneficiaries at your death? Employer plans are notorious for limiting the choices your beneficiaries will have. For example, the IRS rules say that your beneficiaries can stretch distributions out either over their life expectancy, or your remaining life expectancy, depending on the age at which you died. But your employer plan might say, "Take the money out within five years." Or, you might have a family situation where you want the money divided between your heirs in a way that the plan won't accept. IRA custodians are typically more flexible, but ask before moving your money to be sure. Score: IRA.

There are other things to consider, too, such as costs, investment choices and services. I'll deal with those in my next post, coming on Monday. Check back then, or sign up to receive email notices of new posts in the box to the right.