by Nilus Mattive
Tuesday, June 19, 2012 at 7:30am

I often write about more advanced approaches to investing and retirement issues — but the most frequent question I hear is a much simpler one. In fact, a relative just e-mailed me the other day to ask it.

The issue? What to do with an old retirement plan after you leave your employer. And quite often, there’s a corollary … which is what specific investments to use for this money going forward.

Let’s Start with the Basic Choices …

We will assume that the person asking is not retiring or at least 59 ½ years old.

In that case, there are four choices …

Choice #1. Cash out your plan. This is the absolute worst move, in my opinion. Sure, you’ll get some money right away. But you’ll also be responsible for taxes and most likely a 10 percent penalty to boot.

Choice #2. Leave the money right where it is. Most employers (or their plan administrators) allow this, though many impose a certain minimum account balance, such as $5,000. This is a fine choice if you really like the options available through your old employer’s plan. However, from an administrative standpoint, it’s a pain because it will be one more account to keep track of.

Choice #3. Roll the money over to a new employer’s plan. If you’re going to participate in your new employer’s plan (and I hope you will!), then it’s likely that you’ll be able to bring your old 401(k)’s assets into the fold. That will allow you to keep all your retirement assets in one place. Plus, it will be much easier to see how your overall portfolio is allocated.

Choice #4. Roll the money into an Individual Retirement Account.

In nearly all instances, this last choice is my recommendation.

Yes, you might now have one more account to keep track of.

But you also have virtually unlimited investment options. You are no longer at the mercy of your company’s plan or your new employer’s plan.

In an IRA, you can buy pretty much any stock, bond, mutual fund, or ETF. You can even use some conservative options strategies, like the covered call writing approach I’ve talked about before.

Plus, you will also be in the driver’s seat when it comes to the costs associated with your retirement account!

If you read my column last week, you’ll remember that I said a lot of 401(k) plans are charging exorbitant fees for managing your money, and how right now these costs are basically hidden.

Well, in contrast, there are plenty of no-fee IRAs available from deep-discount brokerage houses. Moreover, you have the freedom to select only funds or ETFs with low expense ratios.

Which brings me to the corollary to the initial question …

What Investments Should You Use in this New Retirement Account?

This one is a bit trickier to answer because it depends on at least two important factors:

First, the amount of money you have to invest.

Second, how much risk you’re willing to take (typically correlated to your age).

Quite often, the person asking me this question might have $5,000 … $10,000 … or maybe a bit more to roll over. And they are also often on the younger side.

In that case I’ll usually tell them to use very broad index funds and to simply rebalance every year or so.

For example, they might put 75 percent into the Vanguard Total Stock Market ETF (VTI) and 25 percent into the Vanguard Total Bond Market ETF (BND). Then, every year, they’ll just make sure that allocation stays true.

Just this simple approach will give them a well diversified portfolio with very low annual expenses. And it couldn’t be much easier to maintain.

Plus, for added peace of mind, they could consider dollar-cost averaging into those funds over a couple months or even a year just to avoid a major timing mistake.

And obviously, they could get even more diversified just by keeping some of the money in cash, buying a bit of a gold ETF such as the GLD, etc.

On the other end of the spectrum might be a person who is in a later stage of their career, with a more sizeable nest egg.

For that person, I would be more apt to recommend building a portfolio of dividend stocks, more targeted bond funds, and other niche investments.

But in the end, the one critical thing I can say almost universally is that it’s a major mistake to prematurely withdraw any money from a tax-sheltered account. So even if you’re only comfortable keeping your money in cash, at least do so in an IRA money market.

Best wishes,