Several million Americans will retire over the next few years. Several million more could change jobs. And several million beyond that could lose their employment when the next recession hits.

If your situation is in flux and you have a 401(k)-style retirement plan through your workplace, an important decision awaits: Should you move your retirement money into an Individual Retirement Account when you leave or switch jobs, keep the money where it is, move it into a new employer’s plan — or cash out entirely?

It’s a dilemma that's more topical amid the musical chairs touched off by the Great Resignation. Some people will face this question several times over their careers. Many factors come into play, including taxes. It’s a decision best pondered before the clock starts ticking.

Why you should not cash out

Cashing out of a retirement account can be tempting, especially if you have pressing financial obligations. But it's often the worst choice from a tax and investment standpoint, said Jerry Korabik, a financial adviser at Savant Wealth Management, which has offices in Arizona, Illinois and five other states.

With a straight withdrawal of retirement-account funds, federal income taxes will be due and possibly state taxes, too. The distribution could push you into a higher tax bracket, especially if hundreds of thousands of dollars or more are involved.

If you’re under age 59½, a 10% tax penalty also likely would be due (there are some exceptions, such as full disability). A cash out also is subject to tax withholding.

Plus, you would deplete your account prematurely, perhaps significantly. The impact could hit especially hard if you pull out when the stock market is down. Cashing out is a last-ditch option that's best avoided if possible, Korabik said during a webinar.

The case for leaving it alone

If you instead can leave your retirement account intact, the next question becomes whether you should leave it with your current employer, if that option is available. The alternatives? Move it into a rollover IRA or transfer the money into a new employer’s 401(k), assuming you’re switching jobs and have that option.

Unlike with an outright withdrawal, leaving the money in your 401(k) plan would delay any tax bite, avoid the 10% penalty (if applicable) and keep your investments growing on a tax-deferred basis. You could get the same results by moving the account balance into a new employer retirement plan or transferring the money into an IRA.

Assuming your current 401(k) plan offers a decent array of investment choices at reasonable costs, it might be best to keep the account where it is. One advantage: "401(k) plans are pretty well protected from creditors if you have lawsuits,” Korabik said. IRAs also feature some protections, but they're usually not as strong.

If you move the money into a new employer 401(k) plan, you also could retain those enhanced creditor protections.

Some 401(k) account drawbacks

But your current 401(k) plan — or a new one — might not feature good, low-expense investment options, and the costs might not be all that transparent. Plus, depending on the plan’s policies, you could see limited or costly future withdrawal options, Korabik warned.

IRAs typically can accommodate ongoing monthly withdrawal requests — a nice feature if you're retired — but many 401(k) plans can't, said Dana Anspach, a financial adviser at Scottsdale-based Sensible Money, writing in a blog. And IRAs typically are better at accommodating state-tax withholding requests, she added.

Incidentally, if your account balance is below $1,000, your former employer probably will cash out your account automatically, but above $5,000 the company likely won’t force you to exit the plan, said Scott Laue, another financial adviser at Savant. If you're between those dollar figures, you probably will need to transfer the balance to an IRA, he said.

At any rate, if you want to keep the money with your former employer or move it to a new plan, you’d want to review the features governing those programs.

The case for transferring to an IRA

If keeping the money in a 401(k) program isn’t palatable, or available, you should strongly consider transferring it to an IRA by pursuing a rollover.

“A rollover is a tax-efficient way of moving (retirement account) money from one bucket to another without paying any taxes,” Korabik said.

One key advantage in choosing an IRA is that you likely will have more investment options and thus more control compared to a 401(k) plan, though too many choices can be daunting, too.

Another benefit, if you can afford it, is the ability to make a qualified charitable distribution down the road. This allows people 70½ and older to directly donate money from an IRA to a qualified nonprofit.

With a QCD, you wouldn’t get a tax deduction on the gift, as you otherwise might, but you also wouldn’t pay taxes on the amount given. That can keep your taxable income down, possibly keep your Social Security out of the taxable category and even skirt surcharges that apply to higher-income Medicare recipients. Also, once you turn 72, you generally must take required minimum distributions. A QCD can be used to satisfy these.

Understanding rollover types

With a rollover, it’s important to understand the two main types. The first type of rollover is a direct transfer of money from one account custodian or trustee to another, either electronically or with a check. Either way, no funds are sent to you personally. Nothing gets taxed at this stage.

With an indirect rollover, your employer cuts you a check or makes an electronic payment, with the assumption that you will reinvest the proceeds in an IRA soon.

You have 60 days to complete the rollover by depositing the money in your new IRA. If you fail to meet that deadline or don’t roll over the money at all, the withdrawn proceeds become taxable and, if you’re under age 59½, that 10% penalty likely would apply.

Another caveat with indirect rollovers is that taxes (typically representing 20% of the proceeds) are withheld. You can reclaim this money when you file your tax return next year, but you still would need to come up with the full rollover amount or face a tax, and possible penalty, on the shortfall.

For example, Korabik said, if you rolled over $10,000 on which $2,000 was withheld, you would receive $8,000 with the need to come up with the other $2,000 using other funds. You generally want to avoid indirect rollovers, he said, though the money can come in handy for a short-term loan if you can handle the timing.

Other rollover considerations

As noted, perhaps the main advantages of transferring money from a 401(k) account into an IRA is that you likely will have more investment options and greater control. You also can consolidate accounts.

If you switch jobs often, you might wind up with multiple 401(k) accounts with the attendant problems of managing them all. “You could have 401(k) plans everywhere,” Korabik said.

The average job tenure is only about four years, so this is a concern — along with the possibility that you could forget about some money. There are 24 million forgotten 401(k) accounts worth $1.35 trillion, Laue said.

And if you have 401(k) accounts in many places, you would want to update them all each time you change an address, bank account or beneficiary, Anspach said. "It becomes one more item to keep track of related to your finances and recordkeeping."

It might thus be better to make a habit of rolling 401(k) balances into the same IRA every time you leave a job — or every time a job leaves you.

Reach the reporter at russ.wiles@arizonarepublic.com.

Support local journalism. Subscribe to azcentral.com today.

This article originally appeared on Arizona Republic: What to know about rolling over a 401(k), IRAs when you leave a job