Since the average American changes jobs four times over the course of their 25-30 year working career, it is not surprising to learn that most people have multiple retirement accounts scattered between several financial institutions. For those people who participated in an employer-sponsored retirement plan and then left that company, it is not uncommon for those accounts to sit dormant for several years. It is important to understand the different options available to employees who leave one company for another with respect to what they can or cannot do with their retirement account.

There are only four choices when considering how best to handle an old employer-sponsored account, each one with its own pros and cons. The first choice is to simply do nothing and leave the money where it is. Surprisingly, this is the choice that most people make, not after a conscious evaluation of all the options, but rather the exact opposite. By doing nothing, the account will stay intact as it is, and the balance of that account will continue to fluctuate with the performance of the investment selections.

One of the potential problems with leaving a retirement account with a former employer is the fact that more and more institutions, as a method of cost-reduction, are limiting the time that a former employee's account may sit dormant after termination. Additionally, no further contributions into that account may be made once an employee separates from service. This could prove inconvenient or problematic if the investments in that account are performing well and the individual wants to continue making contributions.

The second option for old employer-sponsored retirement accounts is to close the account and just take the money. A staggering number of people choose this option, many of them without actually understanding the ramifications of their decision. Since these retirement plan contributions are on a pre-tax basis, any withdrawals are subject to ordinary income tax in the year that the distribution is taken. This means that the individual's taxable income will be increased for that year by the dollar amount of the withdrawal. For those people with large account balances, this can pose a significant problem if the additional sum pushes them into a higher tax bracket that year.

Moreover, if the person has not yet reached age 59 during the year in which the account is closed, there will be an additional 10% penalty imposed by the federal government for taking an early distribution from a retirement account. This penalty amount would be on the total gross withdrawal, and would be in addition to the income taxes due.

Consider the following scenario for clarification: Mr. Employee is 35-years-old, has an annual salary of $30,000, and has been contributing to his employer's retirement plan for several years, so his current account balance is $10,000. He receives a job offer from a competing company and decides to accept the position. When he changes jobs, he decides to purchase a new car with the money in his old company's retirement plan. At the end of the year when Mr. Employee files his income taxes, his taxable income for this year will actually be $40,000 because he withdrew the entire balance of his retirement account in a lump sum. He will also owe the government $1,000 as a penalty because he is under 59 -years-old.

The third option for an old company retirement plan is to transfer it into the new employer's plan. Although this option is usually much more beneficial than the first two, it is not always possible. Since there are multiple types of group retirement platforms, and the rules surrounding each one are extremely complex, there is a chance that the new plan will be unable to accept the transfer. Furthermore, even if the transfer was permitted, if the new employer's plan does not offer the exact same investment options as the old company plan, the transfer would have to be in cash. This means that the investment choices in the old plan would be sold, and new selections would have to be made in the new plan.

The fourth choice, which is very often the most advantageous, is to rollover the company plan into an Individual Retirement Account, or IRA. This can be accomplished with no tax liability, and presents the employee with countless investment options instead of the small handful from the company plan. In many cases, if the employee is pleased with the investment selections in the old employer's account, it may be possible to leave them intact during the rollover. By choosing the fourth option, the IRA, employees are also able to enlist the services of a professional investment advisor or financial planner to assist them with the process and guide them through the maze of selections.