This post is from staff writer Sierra Black. Sierra writes about frugality, sustainable living, and getting her kids to eat kale at Childwild.com.

When a friend of mine changed jobs recently, she discovered she had half a dozen old 401(k)s trailing her from her past jobs. She wanted to get on top of her financial planning, but wasn’t sure what to do with all those old investments. she asked me for advice.

Truth is, I wasn’t sure either. I cashed out my one 401(k) to buy a house several years ago. I know that was a dumb move in the larger financial story of my life. Saving early for retirement is one of the best ways to build wealth. I can’t undo it now, though, and I’ve been so focused on paying off debts I haven’t thought much about retirement planning for years.

As my debt burden shrinks, it’s time to start thinking about my own investment strategy. So I looked into my friend’s question: What should she do with those old 401Ks?

What To Do with Old 401(k)s
According to Schwab, there are four basic things you can do with a 401(k) when you leave a job. These are:

  • Take the cash. You can cash out your 401(k) and pocket the money. This is basically Bad Plan Theater, though, unless you’re unemployed and otherwise destitute. Cashing out your 401(k) at any time before retirement is a permanent hit to your future wealth. You can regain the savings at a future job, of course, but you’ll never regain the time you lost earning interest on those savings. The dollars you put into your 401(k) when you’re 25 are worth much, much more to you than the dollars you put in when you’re 40. You want to let your investments age as long as possible before you need to withdraw that money. In addition, you pay 28% in taxes and a 10% early withdrawal penalty for taking your money out of your 401(k). The fees and taxes make this an even worse idea — no matter how tempting it is.
  • Do nothing. If you do nothing with your 401K, it’ll just sit there accruing interest (or investment returns) on whatever money was in it when you stopped contributing. This keeps your money in the same investment plan it was already in, with the same terms and fees. This might be the best option for some people: if your new employer doesn’t have a retirement plan you like, or if you’re starting your own business and want to keep your 401(k) unchanged.
  • Rollover your 401(k) to your new employer’s retirement plan. This is the best option for most people. You can do it without penalty, unlike when you cash out the 401(k). Rolling over your 401(k) keeps things simple. All your investments are in one place, where you can easily keep track of how they’re doing. In addition, all your new retirement contributions will be adding to the pot you’ve rolled over from your previous job. You’ll be limited to your new employer’s investment plans and options, though, so be sure to read the fine print carefully and make sure you like their offerings as much as what you have at your old place.
  • Rollover your 401(k) into a personal IRA. This option gives you the most flexibility. You can put your investments anywhere you like, without being restricted to your employer’s plans. It might be the only choice for people becoming self-employed, other than leaving your 401(k) where it is. On the downside, moving your funds to an IRA may have less protection from creditors than a 401(k), and may carry an annual fee.

One more option: You may be able to roll your 401(k) over into a Roth IRA, as Jeff Rose explains at Good Financial Cents. A Roth IRA lets you deposit post-tax dollars and then withdraw money tax-free after retirement. In general, you’ll pay less tax on your retirement funds by funding a Roth IRA than a traditional IRA or 401(k). Making the switch to a Roth IRA from a 401(k) can be a little tricky, and the amount of funds you can do this with is limited. You may want to consult a financial professional if you’re planning to take this option.

Putting Theory into Practice
After looking at all the options, I advised my friend to consolidate her old 401(k)s into one 401(k) account with her new employer, and to keep contributing to her Roth IRA as well as her 401(k). She can put up to $5,000 a year into her Roth IRA, and her remaining retirement funds into her 401(k). That’s not expert advice — it’s just what makes sense to me after looking into the options. Depending on your individual situation and your employer’s 401(k) offerings, you may find a different approach works best for you.

When I start up my retirement savings again (hopefully this year!), I’ll be following a similar tactic: setting up a Roth IRA and investing in that account first. Anything above the annual deposit limits that we can save will go into my husband’s 401(k).

Since I’m just starting out at this, I’m even more interested than usual in your experiences. What have you done with old retirement accounts when you’ve changed jobs? What types of accounts do you rely on for your retirement savings?