(MONEY Magazine) - Every time you start a new chapter in your career, you face fresh challenges: a different corporate culture, more responsibility, new colleagues and -- if you're at the end of full-time work -- a whole new way of life.

But you've also got one leftover challenge you can't afford to duck: what to do with the retirement kitty from your old job. This is serious money.

If you're early in your career, the few thousand bucks you've got in your 401(k) is likely to be your life savings. If you're at your earnings peak and have worked at one place for a while, your 401(k) and the lump sum you might take in lieu of a pension could easily run into the mid-six figures.

And if you're winding down, well, the money that's in your retirement accounts will have to last.

Just to raise the anxiety level, the decisions you have to make when that cash lands in your lap aren't simple. Should you leave your money with your old company? Is that an option? Do you roll over into an IRA? How do you do that?

Don't kid yourself: The stakes are high. Make the right decision, and your portfolio grows faster and lasts longer. A misstep could mean years of careful saving lost to taxes and penalties, not to mention bad investments.

"Most people have no idea what the rollover rules are," says accountant Ed Slott, author of Parlay Your IRA into a Family Fortune. "And it can be difficult, if not impossible, to undo a mistake."

Still, you can handle this. You just need to ask the right questions about whether to move your money and if so, where and how to invest it. The calculus is different depending on whether you're changing jobs or getting ready to retire, but the mechanics are the same either way.

Get your rollover right, and you'll be a lot closer to rolling in clover.

You've got four options for the money in your old 401(k). Three are good; avoid the fourth.

OPTION 1: Stay with my old 401(k)

• Remaining with your former employer's plan makes sense if it offers you a variety of low-cost, top-quality investment choices and services, such as institutionally priced index funds or free financial planning advice.

• Make sure you're still eligible for all of those same benefits once you leave the company.

• Caveat: If your 401(k) balance is less than $5,000, your employer is allowed to push you out of the plan. In that case, you'll want to set up a rollover to an IRA or to the 401(k) plan at your new company.

OPTION 2: Roll over into an IRA

• Since you can move a rollover IRA to just about any bank, brokerage or fund family, you have far more investment and beneficiary choices than most 401(k) plans offer.

• Consolidating into one IRA could lower your fees and make it easier to rebalance your portfolio and simplify your life.

• You must roll over into a traditional IRA--one in which your money grows tax-free but you owe income tax on withdrawals.

• You can convert later to a Roth if your adjusted gross income is under $100,000 (for singles and for couples filing jointly). You'll pay taxes up front but make withdrawals for free.

OPTION 3: Roll over to my new 401(k) plan

• If your new employer's plan gives you a good fund lineup and useful services, take advantage of it. That's especially true if you don't have a lot of other savings. You'll pay less in fees and get better service in your new 401(k) than you would as the owner of a small IRA at a fund company or broker.

Rolling over to a new 401(k) usually gives you the right to take a loan out against the balance of your new account--you generally can't do that with an IRA or with a 401(k) balance you left at your old job. It's a nice perk, but you should use it only for emergencies.

OPTION 4: Cashing out

Don't do it.

MID-CAREER ROLLOVER How to Invest It

Goal: Make your nest egg grow. So be aggressive, but spread your bets.

• If you are just starting out or you want to keep things simple, your best bet is a target-date retirement fund. These all-in-one portfolios are an easy way to split your money sensibly between stocks and bonds. As you age, the fund's allocation becomes more conservative and tilts toward bonds. Vanguard (800-851-4999) and T. Rowe Price (800-638-5660) offer good options.

• When your portfolio has grown to at least $5,000, you can customize your asset mix by dividing your portfolio among several index funds, such as a total stock market fund, a foreign-stock fund and a bond index fund. Rebalance the mix once a year--that's something you can take care of with a phone call to your fund company. Every five years, review your allocation to make sure it still fits with your investment goals.

• Once you've amassed $50,000, diversify your portfolio further by adding real estate investment trusts (REITs). Also consider specialty funds that invest in commodities such as oil and metals. They tend to move in the opposite direction of stocks and are a good inflation hedge.

You can stand pat in your 401(k) or move to an IRA or annuity. Ask yourself these questions.

1. When will I start taking out money? If you stop working at age 55, you can tap your 401(k) account without paying a penalty. With an IRA, you'll generally pay a 10% penalty on any withdrawals before age 59½. You can, however, dodge the IRA fine by taking equal periodic payments based on your life expectancy for at least five years or until you turn 59½, whichever is longer.

2. What do I give up if I stay in my 401(k)? The short answer: choice. Whether you stay in your 401(k) or move to an IRA, you'll have to start making withdrawals after you turn 70½, with a required minimum based on your life expectancy and your beneficiary's. That's where the similarities end.

With a 401(k), the distribution schedule will depend on your plan's rules. Typically, employers offer few options, either requiring you to take your money out of the plan at retirement or locking you into a set payout schedule. That said, if you're happy with the plan's investment options and the payout schedule suits your needs, you don't have to move your money into an IRA.

IRS rules for IRAs give you much more choice. You can take your withdrawals from any IRA you own or from any investment within your IRA. If you're also still in your old 401(k), however, that distribution is calculated separately. You'll have to make a withdrawal from that account as well.

3. What if I want to leave something for my heirs? IRAs offer more beneficiary options--that was a key consideration for Mary and David Kimbrough (at right) since they have three daughters and eight grandchildren. If you want to pass money on to your descendants, you can defer the tax bite by naming your child, your grandchild or any other younger person as beneficiary to your IRA. That way the heir can stretch the IRA payouts over his or her lifetime--hence the name "stretch IRA"--so more of that money can grow tax deferred. Find out first what custodial and beneficiary options are permitted by the fund company, bank or brokerage you're considering for your rollover.

With most 401(k) plans, by contrast, you're required to list your spouse as beneficiary unless he or she signs a waiver, and only a spouse can make a tax-free IRA rollover. And there's no stretch option.

4. Should I roll over into an annuity? If you have no pension, or only a small one, consider rolling over a portion of your savings into an immediate annuity, which provides a guaranteed lifetime income. Combined with Social Security, the income stream from an annuity can cover a large chunk of your fixed expenses in retirement.

Nearly 100 401(k) plan sponsors, including IBM and Halliburton, offer an online tool called Income Solutions, which allows pre-retirees to shop for annuities at prices lower than they could find on their own. Most employers, however, don't offer annuities. Those that do typically have a deal with one provider and require that you put all your money into the annuity. You'll be giving up an awful lot just for the sake of having your old 401(k) administrator handle some rollover paperwork. You'll be tied to one investment, and you won't be able to count on your portfolio to protect you from a run-up in inflation, which reduces the real value of your annuity income.

A better option: First roll over into an IRA on your own, then invest a portion of your account in an annuity. Keep in mind, though, that annuities are complicated and often irrevocable, so you should consult a financial adviser before you make a move, cautions Stacy Schaus, personal-finance practice leader at Hewitt Associates. Look to low-cost annuity providers such as Vanguard or shop online at immediateannuities.com.

5. What about my company stock? To avoid the risk that a sudden plunge in the stock's price will damage your nest egg, the safest choice is to sell. You can simply cash out and move that money to a more diversified portfolio in a rollover IRA.

But there's another option, and it may offer you a tax benefit. Take the shares in what's known as an in-kind distribution, says Diane Pearson, a financial adviser in Pittsburgh. Yes, you will owe income tax, but only on the amount you paid for the shares, not on their full value. Most, but not all, 401(k)s allow you to do this, and you'll have to close the account and roll over the rest of your funds into an IRA.

Then you can sell the stock, paying a 15% capital-gains tax on the difference between your cost and the value of the shares at the time of the distribution. That's a good deal if your income tax bracket at retirement will be higher than the capital-gains rate, which is currently the case for most people.

You can also move the stock to an IRA if your 401(k) plan allows it. You won't be taxed at that time, but you will owe income tax on the entire value of your IRA, including the stock, when you begin making the required minimum withdrawals.

ROLLOVER IN RETIREMENT

How to Invest It As you set up your rollover, keep the big picture in mind

• With a larger portfolio, you can spread your money among different funds or individual stocks. But don't look at your 401(k) or IRAs in isolation. Consider your spouse's IRA or 401(k), as well as any taxable accounts that you hold, in your overall asset mix.

• If your spouse's plan offers a better choice of, say, foreign or small-cap funds, use that account to buy those investments. Then load up on the best funds for other asset classes in your own 401(k) or rollover IRA.

• As you get older, tone down the risk level of your portfolio by boosting the portion you hold in bonds or cash. But don't cut back too far on equities, especially in the early years after you've left work. You will still need the growth that stocks can provide to stay ahead of inflation.

First you have to decide that a rollover is the right thing to do with your 401(k)--see pages 82 and 84. Then you call the broker or fund company you want to invest with if you're moving to an IRA, or your new 401(k) administrator if that's the direction you're going. Most companies will walk you through the process, fill out the forms for you and even call your former employer to get your money moved. If yours won't, contact your old company to arrange a "direct rollover." Your ex-employer will then make a check out to your IRA trustee or your new 401(k) administrator, not to you.

Oops. What if there's a mistake? If your old company writes the check to you instead of to the new trustee, you have 60 days to invest that money in an IRA or in your new company's plan. You will also have to come up with cash to make up for the 20% automatically withheld for taxes. WARNING! If you miss the 60-day deadline, you'll have to pay income tax on the entire amount of your account that year, plus a 10% penalty. That two-month window also applies if the bank or brokerage makes an error--it happens occasionally--and accidentally lists your account as taxable rather than tax deferred. So make sure that you review any statements you get to ensure there are no slipups.