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Personal Finance

Introduction | Investment Basics | 401(k) Defined | 401(k) Advantages | 401(k) Drawbacks

The Drawbacks

There are some things you should know before investing in a 401(k) plan.

The Money Is Off-Limits Until You Turn 59 1/2

Remember that a 401(k) plan is meant to be a retirement investment. If you withdraw money before you're 59 1/2, you will face some stiff penalties. To begin with, you will be taxed on the money you withdraw. And many plans also impose some financial penalty on participants who make early withdrawals.

This may become an issue if you change jobs or just leave your current job. Many people in this situation choose to "roll over" their 401(k) investments into an Individual Retirement Account or into their new employer's 401(k) plan. By doing this, they avoid paying a penalty or tax.

You Have to Decide How to Invest

It's up to you to decide how your 401(k) money is to be invested. If you've never invested in stocks, bonds or mutual funds before, you'll want to do your homework before investing your money. Wall Street 101 and The Bear's Cave on this site are good places to start. Your plan administrator also most likely has educational materials to help you make informed choices.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.
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