When an employee leaves his or her job, they have a couple of different choices on what to do with their 401(k):

1) They can withdraw the money and spend it as they please, but this comes with a heavy price tag. All the money that is taken out of the plan becomes taxable income that they will have to claim when they file their return at the end of the year. Not only that, if the participant is under the age of 59 1/2 (s)he will also be hit with a 10% early withdrawal penalty.

2) A second option would be to simply leave the money where it is. A lot of 401(k) providers don't require that you do anything with your old 401(k), but this option has drawbacks of its own.

3) A direct rollover to an IRA may be your best bet. An IRA gives you complete control over your assets so you can fit them to your wishes rather than being confined to the parameters set in place by your old company's plan administrator. With an IRA there are unlimited investment options available to you. You have the ability to choose between stocks, certificates of deposit, bonds, annuities, mutual funds or any combination of them. A 401(k) often has only a few different mutual funds to pick from. Rolling over your 401(k) also gives your beneficiaries the freedom to choose what to do with their inheritance. Your spouse is currently allowed to transfer your 401(k) into his or her name once you have passed away, but in many cases any non-spousal beneficiaries would be forced to take that 401(k) as lump sum. In an IRA the beneficiaries would be able to choose whether they wanted to take their inheritance as a lump sum or have it paid out to them over the course of their lives to limit the tax liability.

An IRA gives you control over your money so you can make sure your wishes are met for yourself and those who may survive you. People who leave their money with their employer are often left without anyone to talk to after they separate from the company. In an IRA rollover, you and your advisor can work together to construct a retirement plan that is tailor made to your goals and objectives.

Steve Hicks

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).