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I knew there was an article somewhere on this very question because it is such a frequent question that comes up. I found a couple articles:

"Transfer or Roll Over Your 401(k)?" http://www.fool.com/retirement/retireeport/2001/retireeport010312.htm

"Convert Your 401(k) to an IRA?" http://www.fool.com/foolu/askfoolu/2001/askfoolu010613.htm

Those may be more handy than stating:

1. You can leave your old 401(k) where it is if your former employer allows for it (which they might not if it is under $5,000).

2. Transfer the old employer's 401(k) to the new employer's 401(k). (If you aren't allowed to leave money in the former employer's 401(k) long enough to be eligible to roll into the new employer's 401(k), see 3.b below.)

3. Transfer it to a "rollover IRA" (a Traditional IRA funded exclusively by 401(k) assets/money, preferably as a "custodian-to-custodian transfer"). Which IRA custodian probably depends on your intended investments or timeframe, e.g., with a mutual fund family if you wish the money to go into mutual funds offered by that fund family (including money market funds), a brokerage (for individual stocks, or funds offered through that brokerage), a credit union or bank (for money market account or CDs, though this isn't recommended for long-term investments but may be suitable for a temporary holding place).

Once that money is in the IRA, you could:

3.a. Leave the money in that IRA and invest for the long term.

3.b. Move money from that IRA into the new employer's 401(k), if new employer's 401(k) allows for it. (After January 1, 2002, tax laws allow the money to also be rolled into the new employer's 403(b) and some other retirement plans.)

3.c. Convert some or all of that "rollover IRA" into Roth IRA. This is a taxable event: you will have to pay income taxes for the tax year in which the conversion takes place, the tax amount being based on the dollar value as of the day of the conversion. Many IRA custodians will do a seamless transfer to IRA / conversion to Roth, but the paperwork will show it as two separate steps (401(k) to IRA transfer, IRA to Roth conversion) that just happens to take place on the same day. It is advantageous if the income tax paid for the conversion comes from other sources, such as salary or savings, so you don't get hit with penalties for premature distributions, and money taken out to pay the taxes would be subject to both income tax and (if you are under 59.5) 10% penalty. (This is why you might elect to convert only part of your IRA to Roth instead of all of it, and next year convert some more, in small enough chunks to avoid being bumped into a higher income tax rate and small enough that you can handle the taxes from outside of the IRA.)

4. You can take the money and pay ordinary income tax rates. If you aren't qualified for penalty-free withdrawal (I don't recall if it is 55 or 59.5 for a 401(k)), there is also a 10% penalty on the amount taken out.

As to what you should do, that depends on a number of factors and could become another big discussion about investment issues, expenses, estate planning, tax planning, and potentially asset protection from creditors.
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