In several situations there may be an early distribution from your plan. This is good because you do not have to wait; but it can come with a heavy cost. As you know, when you receive a distribution you must report that money as income and pay taxes on it. But if you take a distribution before the age 59 1/2 you may also have to pay an additional 10 percent early withdrawal federal income tax penalty, which can seriously reduce your retirement funds. The key is to know how to avoid this extra tax.

401k plans may offer a company match, which means your company makes a contribution to your plan whenever you do, usually about 50 cents on the dollar (depending on your plan). This is like a huge year-end bonus, and it is doubly valuable because matching contributions (and your investment earnings on them) are tax-sheltered within your 401k plan.

You have saved and invested for the long term in your 401k plan, accumulating a sizable nest egg. But what happens if you become divorced? In a divorce, your former spouse and any dependents may be entitled to a portion of your 401k assets. If this is the case, the court will issue a qualified domestic relations order (QDRO) as part of your divorce settlement that will define the what, when, and how of the division of your 401k or other retirement plan account.

Employers set up 401k plans for four reasons: to attract, retain, motivate, and facilitate retirement for high-quality workers like you. In order to accomplish this goal, employers design their 401k plans specifically for the employees at their company. This means that while the general principles of 401k participation are the same for all plans; the application of those principles may vary from company to company. Do not be surprised when you change jobs to find that your new 401k plan is different than your previous employer's plan.