Your job is gone, your bank account is dwindling, and that pot of money sitting in your retirement account at your former employer is looking mighty tempting. But the financial penalties you'll likely incur for cashing it out make that a bad idea under almost any circumstances. You're better off either doing an IRA rollover or letting the money stay put.

Option No. 1: Cashing out

First let's look at why the grab-and-go option is the worst of the three.

By cashing out, you not only get taxed and penalized, but you also lose the earnings that money could have generated. You won't even get all of your money: The employer is required to withhold 20 percent for the IRS. If you don't put the money in a qualified retirement account within 60 days, it's taxed as ordinary income. Add on a state income tax, if one applies to you. And if you are under age 59½, you'll incur a 10 percent early withdrawal penalty to boot.

Option No. 2: Leaving the funds behind

To leave it with your former employer, your retirement account must contain a minimum amount, depending on what type of plan you have, and you will not be able to contribute additional money to the account.

Also, if you leave the funds in your 401(k) plan, you may be less likely to keep up with it after you're severed from the company.

"(Former employees) tend to move on," says Charlotte Dougherty, a Certified Financial Planner in Cincinnati, Ohio. "They tend to not pay attention to how their plan assets are invested, and they lose control of that bucket of money."

In some cases, though, leaving the money where it is might make sense, says Daniel Galli, a Certified Financial Planner in Norwell, Mass.

"If there is no need to access the money, the first step somebody should do is to take a look at the employer plan," Galli says.

A large employer may have a plan that, because of the size of its assets, has access to low-cost "institutional" funds that may not be available to individual investors. "They could buy a fund of the same name (in an IRA, for example), but it will have a higher expense ratio," Galli says.

While Galli sees several potential advantages to this option, Patrick Astre maintains there's usually only one good reason to leave your retirement funds behind when you separate from your job. If your 401(k) allows you to borrow from it, letting it stay in place can provide you with a backup when your cash starts running low. Unlike a cash out, the distribution for a loan is not taxed, as long as you repay the money. "But not all plans have that (option)," says Astre, a Certified Financial Planner in Shoreham, New York.

In fact, if you have a 401(k) loan outstanding at the time you leave a company, most plans demand that you pay it up in full right away; otherwise it's treated as a taxable distribution.

Another reason not to leave your money behind: 401(k) plans are often loaded with fees that participants don't even know about. While rules to increase transparency of 401(k) fees have been in the works for years, they're not in place yet, though it's likely that the Labor Department will offer guidance in the near future.

Option No. 3: Doing an IRA rollover

The surest way to get control of your retirement funds without the financial drawbacks is to roll over your funds into an individual retirement account. In a direct IRA rollover, the funds are sent straight from your 401(k) or other qualified employer retirement plan into an IRA without you touching the funds.

"The first step is being sure you have a destination for the money," Dougherty says. "Then you provide the third-party administrator of the former employer's plan the information relating to that new account, including the account number, your Social Security number and whether the assets can be directly deposited via a book entry transfer of shares or by check sent to the new custodian of your IRA."

Another choice, an indirect rollover, works this way: The check comes to you, and you have 60 days to get the money into a new retirement account to avoid taxes and early withdrawal penalties. The 20 percent withholding requirement still applies, so you have to have enough cash on hand to cover that amount. You'll get that money back when you file your return.

Clearly, a trustee-to-trustee transfer of funds is the better option of the two.

Galli says clients who prefer a hands-on approach to retirement planning and a wide range of investment options are good candidates for an IRA rollover.

"Rolling money into an IRA opens the toolbox, so to speak, for the investor to invest in individual stocks, bonds -- the whole range of investments is now available," Galli says.

It also makes sense to do an IRA rollover if you need to use some of the money for educational expenses -- say, to get training for a new career. Although you'll have to pay taxes on the money withdrawn, it won't be subject to the early withdrawal penalty that other distributions incur.