Flex Your 401(k): Don't Tap It

Paying income taxes and a 10% penalty on the funds you withdraw aren't the only consequences. You're also forfeiting the returns you would have earned on the money had you left it in a retirement account. Withdrawing even a relatively modest amount can have a big impact on your nest egg. For example, if a 40-year-old employee with a $10,000 balance earned a 7% annual return, the money would grow to more than $50,000 by the time she retired at age 65, according to Hewitt.

Ritter says you have options if you leave a firm: "If your balance is more than $5,000, you can simply leave the account with your former firm. The second option is to roll it into an IRA, and the other option is to roll it into a new employer's 401(k) plan."

If your old company makes the distribution check out to you, it is required to withhold 20% for taxes. To avoid the 20% withholding, you must arrange for a "direct" rollover. The distribution check from the retirement plan at your old company must be made out in the name of the trustee or custodian of the IRA account that you want to receive the rolled-over funds.

"Obviously, it depends on the individual, but the IRA option gives you a little more flexibility," says Ritter. "If you had to pick one that applies to the vast majority of people, rolling it to an IRA is probably the right choice."