12.5 million Americans face this crucial retirement choice each year

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Saving For Retirement

Changing jobs is a great opportunity to move your career forward, learn new skills, and get a significant pay raise. But for the roughly 12.5 million Americans with 401(k)s who change jobs each year, this opportunity comes with a big retirement decision: What should you do with your 401(k) when you leave?

This crucial decision comes with four choices:

1) Cash the 401(k) out;

2) Leave the 401(k) where it is (or, put another way, do nothing);

3) Roll the 401(k) over to the new employer's 401(k) plan; or

4) Roll the 401(k) over into an Individual Retirement Account (IRA).

Let's explore them briefly and weigh the pros and cons.

Cash out the 401(k)

Liquidating your 401(k) and pocketing the money is certainly a popular choice: According to a Fidelity study, in 2013 a whopping 35% of workers moving jobs cashed out their 401(k)s.

Absent a true financial hardship, cashing out your 401(k) instead of rolling it over is generally a bad idea. Workers who withdraw money from their 401(k) typically must pay income taxes on the balance -- and a 10% early repayment penalty if they're under 59 1/2 years old. Add to that the loss of additional tax-deferred compounding and growth in the account, and you can see why it's rarely the right move.

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Average retirement age in every state
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Average retirement age in every state

Alabama - Age 62

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Alaska - Age 65

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Arizona - Age 63

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Arkansas - Age 62

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California - Age 64

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Colorado - Age 64

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Delaware - Age 62

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Connecticut - Age 64

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Florida - Age 63

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Georgia - Age 62

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Hawaii - Age 63

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Idaho - Age 63

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Illinois - Age 63

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Indiana - Age 63

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Iowa - Age 64

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Kansas - Age 65

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Kentucky - Age 62

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Louisiana - Age 63

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Maine - Age 64

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Maryland - Age 64

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Massachusetts - Age 64

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Michigan - Age 62

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Minnesota - Age 63

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Mississippi - Age 63

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Missouri - Age 63

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Montana - Age 63

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Nebraska - Age 65

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Nevada - Age 63

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New Hampshire - Age 65

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New Jersey - Age 65

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New Mexico - Age 63

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New York - Age 64

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North Carolina - Age 63

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North Dakota - Age 63

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Ohio - Age 63

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Oklahoma - Age 63

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Oregon - Age 63

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Pennsylvania - Age 63

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Rhode Island - Age 64

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South Carolina - Age 62

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South Dakota - Age 63

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Tennessee - Age 63

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Texas - Age 64

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Utah - Age 65

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Vermont - Age 65

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Virginia - Age 63

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Washington - Age 64

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West Virginia - Age 62

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Wisconsin - Age 63

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Wyoming - Age 65

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Leave the 401(k) where it is

This is another common path workers take when they leave their employer. According to one study, over $1 trillion in retirement funds are in "orphaned" 401(k)s that workers left behind with former employers and have largely forgotten. And it's understandable -- after all, when you sign on with a new employer, you have to clear through a mountain of paperwork that's required before you have time for discretionary things like an old 401(k). And it preserves the tax-deferred nature of your 401(k), enabling you to avoid the penalties and taxes that come with cashing it out.

But don't leave it with the former employer. It may get forgotten -- orphaned -- and even if it doesn't, it's going to be a serious hassle to juggle a number of different retirement accounts. It's far easier to consolidate everything together -- which brings me to your third option.

Roll the 401(k) over to your new employer's 401(k) plan

This path has some serious benefits: You get to avoid the penalties and taxes of liquidating your 401(k), preserve the tax-deferred nature of the account, and also keep your 401(k) retirement savings all in one place. It may be the best move for you, but a lot of that depends on what your new 401(k) plan looks like. It's important to read the fine print and find out what the administrative costs and fees are. It's worth taking the roughly 12 minutes to check out the mutual funds in that account, given the enormous implications their expense ratios have for your retirement.

Roll the 401(k) over to an IRA

Like moving your 401(k) to your new employer's plan, this option protects the tax-deferred nature of your 401(k). And like rolling your 401(k) over to your new employer's plan, this largely depends on your preferences and the design of your employer's plan. If your employer's plan is designed with lots of high-load mutual funds and administrative expenses attached, you might be better served by putting your 401(k) in an IRA and investing in index funds (or even individual stocks). A lot will depend on your IRA provider, too -- what administrative fees they charge, what transaction costs you will incur, and the like.

As the primary retirement savings vehicle for American workers, your 401(k) has big implications for how you fund your golden years. Ensure that you make a thoughtful, well-informed decision when, like 12.5 million Americans each year, you're faced with this choice.

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