One of the biggest things that you need to consider is that you must have a goal for your retirement. Do you know where you want to live or what lifestyle you want? If you really want to reach your goals and use the Fidelity 401k to do so, you really need to consider where you want to be when you retire.

Almost all people decide that they want to be rich when they retire, but you really need to define “rich” in order to set your goals. If you want to move to a different state, what is their cost of living? What will your mortgage be like then? Will you pursue different hobbies or travel a lot when you retire? Your golden years should be a time when you can relax, kick back, and enjoy things like that you didn’t get to when you work. A Fidelity 401k can help you reach that goal.

Fidelity Investments have been in business for a long time, and have helped many people reach their retirement goals. They are a really exeperienced company and have a wide variety of mutual fund options for your 401k to consider.

Simply look at the track record. Quite simply, Fidelity offers a wide range of mutual funds, ranging from relatively conservative to more aggressive. Depending on what kind of investor you are, you can make your investment decisions accordingly. Obviously, more aggressive regional funds will tend to have bigger ups and downs in a more conservative one, but also will possess much larger growth potential especially in the long run.

If you are looking to invest money for the short term, then a more conservative mutual fund would probably be best for you. However, if you plan investing for retirement (hence retirement planning), a more aggressive mutual fund will be right for you. No matter which you invest in, absolutely make sure that retirement fund has exhibited a long and profitable history before getting involved with it. Past history is a good indication of future performance.

The bottom line is this: if you really want to reach your retirement goals, and reach your full potential with investing, then you should learn how to do it yourself. Nothing substitutes taking control of your finances and spotting investment opportunities on your own. However, if you don’t have the time or the desire to do this, the Fidelity 401k might be a good option for you. Of course, there are many other companies that offer great retirement planning options as well; you simply need to do your research and find the best one for your needs.

So, who is right?  Which is the better plan to follow when the market “sucks”?

During a market downturn, or recession, many financial “gurus” will tell their clients and self directed financial geniuses to dump their 401k and put their money into other investments such as bonds or CD’s.  This can create several bad consequences, not to mention the 401k early withdrawal tax issues.

Sometimes this advice isn’t all bad, but it really depends on numerous factors, such as how close you are to retirement, your current balance and what types of investments you are currently in with your 401k.

Generally the best advice when dealing with a 401k and recession is to leave it alone or even increase your contribution.  But wait, I said increase your contribution?  Am I high?  Nope, so let me explain.

The 401k is a long term investment device.  Generally you want to be investing into your 401k for over 10 years at a minimum to really see the compounded interest and gains.  The market historically has adjustments, up and down times throughout the history that can be shown with this chart:

As you can see, even though the market has faced its share of ups and downs, the general trend is up.  So where does that leave you with your 401k during this recession?

Many people can’t afford to increase their contribution in this time of higher gas prices and downturn in the economy.  My advice would be to not try and sacrifice your family.  If you can safely afford to increase your contribution, then you really should explore the possiblity of doing so.

But, what can you expect if you have a 401k early withdrawal?  What are the taxes on a 401k early withdrawal?  How will the 401k early withdrawal penalties affect your overall retirement planning picture?

The 401k is a great plan that if used wisely will accumulate money over the long term for your retirement.  There are several considerations that must be thought about if you are considering having to tap into your 401k.  The main principal that must be remembered about the 401k, or any long term retirement plan, is the principal of compounded interest.  So, let’s take a look at a quick and simple example to explain compounded interest.

If you invest a mere $5,000 into a 401k to start, after 30 years at 6%  your initial $5,000 will grow into around $30,000.  However, if your rate of return is 12%, which isn’t unheard of with 401k plans, you would have around $180,000.  That is a $150,000 difference!

So, if you tap into your 401k plan for a short term fix, you are effectively limiting your return on your investment by interrupting the compounded interest you would earn on your money.

There are certain penalties that a 401k early withdrawal would also incur.  Not only would you have to pay an immediate 10% penalty of any money that you withdrawal, but you will also pay taxes on that money as well based upon your current tax rate.  How does that work?

Well, if you were to request a withdrawal of $20,000 from your 401k, you would pay an immediate $2,000 penalty for it.  So, you are left with $18,000.  Now, you might not think that is to bad, but, you will still have to pay taxes on that money just like it is regular income.  So, when you pay your taxes, let’s say a conservative 28% tax bracket, you will pay $5,600 in taxes on it!

So, to take $20,000 from a 401k early withdrawal, you will pay around $7,600 in taxes and penalties.   If you look at the earlier example, you have just paid more than your “initial investment” to have your own money!  If you are willing to throw that kind of money away, please let me know, I’ll take it!  Just kidding…

While the 401k early withdrawal penalties are pretty steep and heavy with taxes, if you really need to access your retirement funds, there are options that you can explore.  You could use a 401k loan, which means that you are borrowing against your 401k account.  You will have the funds without the penalties and taxes, however, you will be responsible for paying it back.

While a 401k early withdrawal might seem like the only option to consider during a financial crisis, there are several other options that will not affect your long term retirement planning as severely.  Knowing these options and how the 401k early withdrawal penalties and taxes will affect you will give you guidance in saving the most money for your retirement.

Plan Administration Fees - This is the everyday operation fee for basic administrative services, such as record keeping, accounting and other services. This fee is necessary to administer the plan as a whole. Also, other options and features of your individual 401K plan may be charged into this category as well. Other services may include telephone voice response systems, access to a customer service representative, educational seminars, retirement planning software, investment advice, electronic access to plan information, daily valuation and on-line transactions.

In certain cases, the costs of the administrative services charge will be covered by investment fees that are deducted directly from investment returns. If they are not, then they could be charged separately and will be paid by your employer or charged to the assets of the plan as a whole. When paid directly by the plan, administrative fees are either allocated among individual accounts in proportion to each account balance (i.e., participants with larger account balances pay more of the allocated expenses) or passed through as a flat fee against each participant’s account. Either way, generally the more services provided, the higher the fees.

Investment Fees - One of the largest 401(k) plan fees and expenses is the investment fee. It is associated with managing plan investments. Fees for investment management and other investment-related services generally are assessed as a percentage of assets invested. You should pay attention to these fees. You pay for them in the form of an indirect charge against your account because they are deducted directly from your investment returns. Your net total return is your return after these fees have been deducted. For this reason, these fees, which are not specifically identified on statements of investments, may not be immediately apparent.

Individual Service Fees - In addition to overall administrative expenses, there may be individual service fees associated with optional features offered under a 401(k) plan. Individual service fees are charged separately to the accounts of individuals who choose to take advantage of a particular plan feature. For example, individual service fees may be charged to a participant for taking a loan from the plan or for executing participant investment directions.

So, how does this affect your 401K?

While most people look at the 401K as a long term retirement investment, if you are getting closer to retirement, you could be sweating it out. While the Bear Stearns collapse was met with jitters and shakes on the stock market, the DOW did close up almost 30 points.

Your 401K should be fine as usually just one big news item like the Bear Stearns collapse and merger with JP Morgan shouldn’t affect it. Although your 401K does bear some watching over the next few weeks as it could take a hit on any investments that were owned or managed by Bear Stearns.

Bear Stearns merger notice

The 401K Debit Card allows you to open a line of credit against the amount available in your 401K account. This will allow you to borrow against loan provisions of your 401K account. Yep, you can go shopping for that big screen HDTV and instead of using a credit card or money you have in the bank, you can swipe your 401K debit card and use those funds.

The 401K debit cards will allow a cardholder to take out a loan from your employer-sponsored 401(k) retirement account. Usually restrictions on the 401K account funds discourage account holders from making withdrawals before they are 59½ years old.

So, are you thinking about getting a 401K debit card? With a traditional 401k loan, the repayment starts automatically to repay the loan through payroll deduction. This is if you take an actual loan from your 401K account. So as long as you’re still working you’re guaranteed to make the payments.

With the 401k debit card, this is not the case. With the 401K debit card, the employee is actually billed each month just like another credit card. So it is actually possible for someone to miss payments and ultimately default on the loan, even while working for the same company! This could result in substantial taxes and penalties for an early withdrawal.

Early withdrawals from 401(k) plans come with taxes and fees, which could deprive account holders of their nest eggs if they fail to replace the money promptly.

So what are the problems with 401K debit cards?

The first and most obvious problem with the 401K debit card is the ease of accessing your retirement funds. Traditionally, to take a loan against your 401k retirement plan, you had to either fill out a form or call your plan provider to request the loan. Then, it may take a week or more to actually receive the money.

With the 401k debit card, you can simply carry the 401k debit card in your wallet or purse and swipe it whenever you want to make a purchase.

“For every $10 you take out of the account, you only have $6 or $7 to spend, probably closer to $6, which means you’re giving up a third of your money,” said Stuart Ritter, certified financial planner for T. Rowe Price, a Baltimore asset-management company. “You’re also giving up money to spend in retirement, so you are by definition lowering your lifestyle in retirement.”

The second problem comes from the way the repayment is handled. With direct monthly statements to you, if you are having to borrow from your retirement plan in the first place, it is probably because you don’t have the money available elsewhere. If that is the case, is it really likely that you are are going to have the money to make the monthly payments? At least with a traditional loan the payments are withheld through payroll, so they have no choice but to make the payments.

Let’s take a look at some simple math on what a 401k debit card will actually cost in you in terms of your retirement savings.

An individual with $20,000 saved in a 401(k) account who contributes $100 every month, assuming an average annual return of 8 percent, would have almost $364,000 saved for retirement in 30 years.

However, the same individual who borrows $10,000 from the plan pays the loan back over five years and stops contributing to the plan while paying back the loan. That same individual would have just $203,000 — a difference of about $161,000.

An easy rule of thumb to remember: Every $1,000 you withdrawal from your 401(k) plan equals about $10,000 less in retirement income.

Still ready to get that 401K debit card now?

Although you don’t get the tax deduction up front, meaning you pay the taxes on the money now, the account grows tax-free, and withdrawals taken during retirement aren’t subject to income tax. This can translate into tax savings as most people are in higher tax brackets as they get older. Also, you won’t pay taxes on the money provided you’re at least 59 1/2 and you’ve held the account for five years or more.

The Roth 401K concept was introduced with the Economic Growth and Tax Relief Reconciliation Act of 2001, which stipulated that employers could start offering these plans in 2006. So far, there is a relatively low amount of employers which offer the Roth 401K.

The Roth 401K will offer some advantages to high-income individuals who haven’t been able to contribute to a Roth IRA because of the income restrictions. The Roth IRA eligibility for 2008 phases out between $101,000 and $116,000 for single filers and $159,000 to $169,000 for those who are married and file jointly. There are no income stipulations for the Roth 401K.

Currently in 2008, the Roth 401K accounts are subject to the contribution limits of a regular 401K — $15,500 for 2008, or $20,500 for those 50 or older by the end of the year — allowing individuals to stock away thousands of dollars more in tax-free retirement income than they would through a Roth IRA. (In 2008, Roth IRA contributions are limited to $5,000 a year, or $6,000 for those 50 or older.)

While thinking about being retired can be a pleasant and relaxing way to pass some time, actually doing something like planning for your retirement seems to be a thing that way too may of us avoid or just let slip by, often until it’s so late in our working life that building up retirement funds is a huge, extremely difficult and painful job. OK, so it isn’t a real fun topic. Ignoring it, however, is a very stupid move. We all need to face the unpleasant reality that without doing some serious planning and actually accumulating those funds starting now, we may have a truly miserable retirement. Since 401K contributions are pre-tax, and since the contribution limits are pretty generous, this is a chance to substantial improve your life after retirement.

The 2008 401K contribution limits for employee contributions is going to stay at $15,500. This is the “elective salary deferral” portion of the possible 401K limits. What you need to keep in mind is that your employer will also probably set a specific limit such as 10% of your salary. In that case, the actual limit will depend on your salary and will be the lesser (it’s always the lesser, isn’t it?) of 10% or $15,500.

If you happen to be luck enough to work for an employer who will make a matching contribution, then it would be grossly stupid not to contribute to a 401K since it makes you an instant winner. Generally the employer will match on a less than dollar for dollar basis, say, 50 cents for each dollar, up to a percentage of your salary. So, as an example, if an employer will do a 50 cent match for up to 8 percent of your salary, you gain an instant pre-tax 4% put away for your salary when you contribute at least 8%. If your employer does do a match, then that’s a deal you want to be sure not to miss out on.

It was a surprise to many that the anticipated increase in the “catch up” contribution didn’t happen. Those over 50 have a chance to make an additional $5000 contribution next year that is in addition to any other contribution.

For the self-employed, there is an additional possibility. A profit sharing contribution of up to 25% of your eligible salary can go into your 401K. The exact amount depends on whether you are incorporated or unincorporated, but this is in addition to your salary deferral and any allowable catch up contribution.

Particularly for the self-employed, you need to be aware of the overall total 401K contribution limits which have increased to the lesser of 100% of salary or $46,000 for 2008. The catch up contribution is not included in this limit so under ideal circumstances and if you were over 50 years old, you could contribute $51,000 and still fall within the 401K limits.

For self-employed entrepreneurs, especially those over 50 with a substantial income this can represent not only a large tax savings but a very substantial addition to your retirement funds. With the control offered by a Solo 401K or Individual K plan, you also have maximum flexibility in choosing your own investments. Getting your planning in place now so that you can take the best possible advantage of the 2008 401K contribution limits is smart business and can greatly improve your quality of life when you do retire.

While the 401K plan has many advantages, there are a couple of disadvantages to consider. One disadvantage is that it is not easy to withdraw money prior to age 59 ½. There is a large penalty unless it is for education or emergency. Another disadvantage is that they are not insured by the Pension Benefit Guaranty Corporation.

The Pension Benefit Guaranty Corporation insures pension benefits for a lot of companies. Since the 401K plan is based on mutual funds, you are risking your money just like millions of others on the values of stocks and bonds.

Usually the employee is allowed to choose from a variety of mutual funds in which they can invest the contributions they make to their 401K plan. Typically you may choose from a low risk, medium risk or high risk and allocate a certain percentage to one or all of these funds. Typical investments in a plan include money market funds, bonds, stocks and treasuries. You are allowed to change your investment percentages and deductions at certain times of the year.

The 401K retirement plan is watched over by the government and, in fact, is named for the section of the Internal Revenue Code of 1978 where it is stated and is administered by the Employee Benefits Security Administration - a division of the Department of Labor. That being said, companies have full control over the funds and the investor has many choices on how to invest his retirement savings. It’s a good idea to take full advantage of this plan in order to accrue the most amount of money for your golden years.

The 401K, either the traditional or Roth 401K, is a retirement plan that is offered to employees by most companies. The employee portion of the contribution is deducted from your paycheck, and sometimes the company will match your contribution up to a certain amount.

The amount that is matched can vary, but it is usually based upon a certain percent or dollar amount. In certain cases, company matching is not an option.

The great thing about contributing to a 401K plan is that the money is deducted from your paycheck prior to taxes being taken out. The exception to this is in the case of the Roth 401K, which the contribution is taken with after tax money. This is because the Roth 401K pays out with no taxes.

If you are a small business owner with only a limited handful of employees, this could be a great offer to your employees. While you don’t have to offer matching on contributions, you can still set up a 401K plan with numerous companies such as the Fidelity 401K plan. There are certain requirements however that have to be met in order to qualify for the 401K plans that are available. Each company can clarify those in more detail.

Although most employees think that the small deduction in each paycheck won’t amount to much in the 401K retirement plan, when this amount is added up over ones career, the compounding of interest can really make a substantial difference.

Most companies require a certain vesting period. This means that you must work a minimum amount of time in order to keep any company matching funds in your 401K. So, if your company has a 5 year vesting period and you leave before 5 years, then you can only take the contributions that you have made into the 401K up to that point.

While there are many aspects of the 401K plan, this is only the beginning. There can be some complicated aspects to many 401K plans, and with the requirements and contribution limits changing each year, it can become a burden to keep informed about your 401K.