Liz Weston

Dear Liz: I just got a message about thousands of dollars I have in a 401(k) account from a job I had over 10 years ago. They are asking me what I want to do with the money, roll it over into an IRA or cash it out. What should I do?

Answer: Don’t cash it out.

Unexpected money can feel like a windfall, and it’s natural to dream about potential splurges you could afford. But this cash didn’t fall out of the sky. This is money you earned and that could grow substantially if you make the right moves now. If you cashed it out, you’d lose a substantial chunk to taxes and penalties, plus you’d lose all the future tax-deferred growth that money could earn.

Your best option probably would be to transfer the money directly into your current employer’s retirement plan, if you have one and it allows such transfers. Employer plans may offer lower-cost access to investments than you’d get with an IRA, plus consolidating the old plan into the new means one less account to monitor. Also, employer plans may offer more protection from creditors, depending on where you live.

Rolling the money directly into an IRA is another good option. You’ll need to open an account, preferably at a discount brokerage that keeps costs low. An IRA would give you access to more investment options, but beginning investors might just want to opt for a target date retirement fund or a robo-advisory service that invests using computer algorithms. With either option, the mix of investments and the risk over time would be professionally managed.

Whichever you choose, make sure the old plan sends the money directly to your chosen option, rather than sending you a check. If a check is sent to you, 20% of the money would be withheld for taxes and you’d have to come up with that amount out of your own pocket within 60 days or that portion would be considered a withdrawal that’s taxed and penalized.