It seems like in every seminar we conduct there are a number of people who have been caught in one of the 401(k) hazards that can hurt unwary investors. Some have forfeited free money offered by their employer. Others have incurred IRS penalties that could have been avoided. While each employee has the best of intentions, these mistakes can spell disaster for some as they struggle with the challenges of hitting their 'comfortable retirement' goals.

The Miss-the-Free-Money Hazard
If your employer provides a matching contribution to your 401(k) account, you are making a mistake if you are not getting every penny of the free money you're eligible for. Unfortunately, lots of people fall into that hazard. Industry sources tell us that at least 25% of eligible employees fail to take advantage of that free money!

For example, if you contribute $3,000 to your 401(k) through salary deductions, and if your company offers a 50% match on your contributions up to a certain limit, you can pick up an extra $1,500 of free money! That's like an immediate 50% profit in the first month! Why wouldn't you want to do that?

One caution: some employers have a vesting schedule, meaning that if you leave the company within a short time, you may have to leave your employer's contribution behind. The portion that you contributed is always yours to keep. If you have questions about your plan, it is best to talk to your Benefits Department or your financial advisor.

The Pay-Too-Much-Tax Hazard
We are often asked in our seminars, "What's the most beneficial place to start investing for retirement?" The answer is two-fold: The very first place to invest is in your employer's 401(k) to the extent of your employer's match. The second most beneficial place is a Roth which you can set up with almost any financial institution or investment advisor.

The power of a Roth account is often underestimated. Would you rather pay tax on just your contributions, or on your contributions and your future growth? If you follow some simple rules, the growth in your Roth is completely tax free! Even though you don't get a tax deduction on your initial contribution, the tax-free growth over time may make up for it, depending on your tax rate in retirement and investment performance. In fact, if you work through the numbers, you'll see that a Roth contribution over a person's career may produce over twice the spendable income in retirement compared to a similar IRA contribution including the tax savings.

Here's the key difference: the money you contribute to a 401(k) or traditional IRA, plus all its growth over time, will be taxed at your top marginal federal and state tax rate when you withdraw it. Another way to look at it: as much as 45% of your 401(k) or IRA actually belongs to the IRS - they just haven't asked for it yet! In stark contrast, withdrawals from a Roth are tax-free. Your whole Roth account belongs to you!

There are some general eligibility requirements for a Roth which change from year to year. And there are some simple rules that must be followed. Check with your financial advisor to make sure you do it right.

The Company Stock Hazard
Everyone has heard that it is important to diversify - spread investments prudently among different stocks, bonds, and funds. But still a huge number of people walk into our offices with a 401(k) that is heavily invested in their employer's stock. They sometimes say that they had to demonstrate their loyalty to the company while they were working there. Does that make sense? Will your company make up your losses in their stock as a reward for your loyalty? There is just too much risk in holding that much of any stock, regardless of how good it is.

Our advice is simple: if you have more than 5% of your investments in any one company's stock, sell it and move the money to a diversified position. And if your employer tries to tell you to keep it, ask them to look into fulfilling their fiduciary responsibility in running the plan.

The Withdrawal Hazard
When you retire or take a job with another company, you have some choices of what to do with your 401(k) money.

1. You could cash out of the plan, take your money, and run. In most cases, this makes no sense at all, because you may pay a 10% penalty (if you're not yet age 591/2) in addition to your top income tax rate on the whole amount. The IRS could take over half your hard-earned savings, depending on your tax bracket.
2. You could leave your money behind in your old employer's plan, if they permit it. But, unless they your old employer's plan has a particular investment not available to the public, why would you want to do that?  There are many investment strategies available in a rollover IRA that are simply not available in a 401(k). In addition, stretch IRA options are unavailable in a 401(k) and beneficiary restrictions sometimes inadvertently disinherit your intended heirs.
3. You might be able to move your money to your new employer's plan. But again you would have the same disadvantages mentioned above as your old 401(k) and the money is tied up until you leave your new employer.
4. You are eligible to do a direct rollover of your 401(k) to an IRA. Done properly, this move is completely tax free. One caution: don't do this without professional help, because if you take the money yourself, the IRS will assess you a hefty tax bill and may subject you to 20% mandatory withholding.

While 401(k)s can be a terrific way to accumulate for your retirement, there are subtle rules that may be more complicated than you think. Make sure you are taking the right precautions to protect yourself before you fall into one of these hazards.