When you change jobs, your choices are to leave your 401(k) money where it is, move it to your new 401(k), or move it into an IRA.

You could cash out the plan, but that's the financial equivalent of shooting yourself in the foot, because you'll pay income taxes plus a 10% penalty if you're under age 59-1/2. You'll also lose out on tax-deferred saving.

If you've built up a hefty balance in your old plan, and you have access to funds you love that are otherwise closed to investors, you might want to leave the money in the plan. That's especially true if your new plan isn't so hot.

Still, there are good reasons to take your 401(k) money with you. Some planners argue it's good to have all your money in one pot, working for you as a single asset. You'll have access that way to a loan you can tap in case of emergencies.

If you're moving to another job that does not offer a 401(k), it makes sense in most cases to move the cash into an IRA, because you'll have greater control. Instead of 10 or 20 investing choices, you'll have access to thousands of mutual funds. But it's important to remember that 401(k) accounts are a bit more protected from creditors than IRAs -- something that could become important if you are ever sued or file for bankruptcy.

New portability rules

In the old days, investors were required to put 401(k) money into something called a rollover IRA or a "conduit IRA," if they thought they might move the cash back into another 401(k) down the road. They had to be careful not to mix that money with any other retirement dollars. And they couldn't make new contributions to the account, either.

But you're now free to blend those dollars. You can put 401(k) money into an existing traditional IRA and continue making contributions. Or, you can move your 401(k) account to a new IRA and then transfer that into a Roth IRA.

In all cases, however, just be sure you perform what's called a "trustee-to-trustee transfer," when you move the money. That means you direct the company housing your new account to arrange the transfer with your old employer.

A trustee-to-trustee transfer will avoid the costly trap when your old employer writes a check to you for your balance and you have 60 days to deposit it in a new account. If you choose this method, your old employer will automatically withhold 20% of your balance for income taxes. You'll get the 20% back the next time you file your income taxes, but in the meantime you'll be required to make up the difference within the 60-day period.

If you fail to roll over the full amount in 60 days, the IRS deems the shortfall a taxable withdrawal and imposes ordinary income taxes plus a 10% penalty.