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their investments - choosing to change how new contributions are invested, moving money between current investments, or both. Usually, moving money around this way is free - with the transaction costs covered by the mutual funds or included in the administrative fee for the plan. To prevent people from trying to time the market, there are often penalties for frequent changes. The definition of frequent varies: some plans say more than once a year is frequent. Other plans have 30, 90 or 180 day holding periods.

WITHDRAWING FUNDS

It is possible to withdraw money from a 401(k). However, anybody younger than 59 will be hit with a 10% penalty on top of the 20% witholding for taxes. There are a few exceptions to the 10% penalty, but the 20% in tax witholding must always be paid.

Everybody pays 20% on withdrawals, but the 20% is income tax paid and is treated normally on your tax return for the year. Individuals over 70 years old must take 'required minimum distributions' even if they do not need the money.

Some plans offer the ability to take loans against a 401(k) account. These loans are limited in how much or how often. Unfortunately, as other Helium articles will attest, taking a loan from a 401(k) account is seldom a good idea.

SUMMARY

With the decline in defined-benefit (pension) plans, the 401(k) has become the most commonly available retirement account offered by employers. Maximizing contributions to a 401(k) is a good way to help plan for retirement. For most people, using this investment choice by itself is not going to be the best choice in planning. Choose to maximize the company match to the 401(k), fully fund other investment choices, and then contribute the maximum pre-tax amount to the 401(k). This method generally produces great retirement results.

Your individual situation may vary however. If you are unsure, talk to a certified, fee-based advisor to get help making the right choice for you.

Learn more about this author, Jack Thornton.
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