Rolling over your money
However, there are also potential drawbacks to leaving your money in an old 401(k). As mentioned previously, some 401(k) plans offer mutual funds that charge high fees, which can eat into your returns over time and leave you with less money once you retire.
Another drawback to leaving your 401(k) money with former employers is that you can easily accumulate a half-dozen accounts by the time you reach retirement.
That makes managing your portfolio tough.
Another disadvantage is their lack of flexibility -- the vast majority of 401(k) plans restrict investors to mutual funds and company stock.
That's where IRAs come in.
Both traditional and Roth IRAs offer a wide variety of funds, individual stocks, bonds and certificates of deposit from which to choose.
"The fact that you can essentially invest in almost anything is a major benefit with IRAs," says Nick Kaster, senior analyst at Wolters Kluwer. "With 401(k)s you're limited to investments that your employer provides and, in some cases, they may not be good."
Those who opt to directly roll their fund into a traditional IRA via a trustee-to-trustee transfer pay no upfront taxes, although they will pay tax on their withdrawals during retirement.
Those who roll over into a Roth pay their taxes upfront, but the earnings grow tax-free.
Roths are often recommended for younger employees with lower incomes, who may choose to pay taxes on their contributions today and enjoy tax-free withdrawals down the road.
They are also well-suited for those who may need early withdrawals for non-retirement related expenses.
The Internal Revenue Service allows retirement savers under age 59 1/2 to withdraw the earnings portion of their Roth IRA penalty-free as long as the account has been open at least five years and the money is used for qualified expenses, including the purchase of a first home, higher education or medical cost. The original after-tax contribution to a Roth -- your principal -- can be withdrawn without penalty at any time for any reason.
The contribution amount allowed for Roth IRAs, however, begins to phase out for joint filers with incomes exceeding $181,000 in 2014, and for singles and heads of household with incomes exceeding $114,000.
Whatever IRA you choose, remember to instruct your employer to complete a "direct rollover," where your money gets moved from your 401(k) to your IRA without touching your hands.
Withdrawing the money yourself would be viewed as a cash distribution, and taxed and penalized accordingly.