If I change jobs a lot, should I consolidate my retirement accounts?

Should you put all your retirement eggs in one basket? See more money pictures.

This is a question that every American worker should be asking. Long gone are the days of staying with the same company for an entire career. According to the U.S. Bureau of Labor Statistics, even the youngest baby boomers worked an average of 10.2 different jobs from ages 18 through 38 [source: BLS]. The millennial generation (born between 1977 and 1997) jumps ship even faster, projected to hold an average of 15 to 20 jobs over the course of their careers [source: Meister].

Not all jobs offer retirement benefits, but if you are lucky enough to receive a 401(k) plan, you need to think about what you want to do with that account if (more like when) you leave your job. According to retirement planning experts, you have three major options:

  • Keep the 401(k) with your old employer
  • Transfer the funds to a 401(k) at your new job, or
  • Rollover your old 401(k) into an IRA

What you absolutely positively should not do is cash in your 401(k) when you change jobs. If you are younger than 59½, not only will you have to pay income tax on that money, but you will owe an additional 10 percent "early distribution" penalty. Let's say you're in the 28 percent tax bracket and you have $10,000 saved in your 401(k) account. If you withdraw the money early, you will lose $2,800 to taxes and an additional $1,000 to penalties, leaving only $6,200 in your pocket.

It's important to understand that you, the employee, are responsible for managing your retirement accounts, not your employer [source: Wohlner]. So even if the thought of comparing 401(k)s to IRAs makes your head spin, take time to do your homework and take charge of your retirement planning. You'll thank yourself later.

Let's start by looking at the benefits of leaving your 401(k) right where it is.