401K plan are primarily used as a way to save money for your retirement. They reduce your annual spendable income buy the amount you contribute and there is a maximum percentage of your earned income that you can stash away in your 401k plan.

The reason people use a 401k plan to fund retirement is that the monies that you put into your plan come right off the top of your gross income when its time to pay your annual Federal taxes. This deduction for deposits made to your fund are added to other authorized and earned deductions that effect your net income, the net being the amount you are left with to pay taxes on. So the more you contribute to your retirement plan, the less you will pay in taxes each year.

Less taxes and more money in your savings sounds like a great idea. And it truly is until something comes up and you need to get to your money. The 401k is the most penalized form of retirement plan when it comes to getting at your money. Even for a good reason like a medical emergency.

You will not only pay a fee that further reduces the amount in your retirement account, but you must pay back the money and interest will be added to those payments just like it was a bank loan. The difference here is that you are borrowing your own money. So before you dump the maximum amount into your 401k, make sure you won’t be needing it until retirement or the good deal that it is goes sour.

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