Dos and don'ts of 401(k) investing

Talk to most full-time employees saving for retirement, and you'll find that an employer-sponsored 401(k) is the way most are planning for their golden years.

But while 401(k)s are common, they have some specific rules that can be confusing. And let's face it — anything that has to do with long-term financial planning can be intimidating.

Thankfully, the basic premise of these accounts is easy to understand: Take pretax dollars out of your paycheck, invest them over many years and ultimately wind up with a decent nest egg come retirement.

Of course, the size of that nest egg can vary greatly based on a host of factors. So how can you make the most of your employer-sponsored retirement plan? Here are some 401(k) investing dos and don'ts:

The Dos

• Do start saving early, even if you don't make much: Compound interest is one of the most powerful forces in the universe, so saving a little cash and giving it a lot of time to grow is often more effective than saving a lot of cash for a short amount of time. Consider two ways to get to $1 million by age 65: Sock away about $4,700 a year starting at age 25 and invest with a 7% rate of return … or save and invest about $23,700 a year starting at age 45. While it might be hard to save even a few grand at 25, it's going to be just as painful to save a huge portion of your earnings in the prime of your life. At least in the former scenario, it eventually gets easier.

• Do take full advantage of your match: An extra incentive to save: employer matches, which essentially amount to free money. Your company puts a little bit extra in your 401(k), simply as a reward for saving — something you should be doing anyway. Don't leave this on the table.

• Do contribute from bonuses: Windfalls are nice if you have your eye on a special set of shoes or a beach vacation. But while there's nothing wrong with enjoying the fruits of your labors in a bonus, take the occasion to feed your long-term savings goals.

• Do increase contributions with raises: Countless studies show that making savings automatic means consumers notice the "lost" money less, so make arrangements with payroll to adjust up your 401(k) contributions each year with your increased salary. You'll never miss the money, but you'll be quite thankful come retirement.

• Do closely check vesting of your match: While a match is nice on paper, some companies put strings attached to these matching funds via "vesting" schedules. The money you contribute into a 401(k) will always be yours, but some employers can (and do) reserve the right to claw back matching funds if you quit in short order. Federal law limits these vesting schedules, but terms can still be ugly — such as requiring a employee to work a minimum of three years or else forfeit every single penny of their match! Whatever the vesting schedule, make sure you are informed and using those terms to guide your decisions about contributions — or when to take that new job.

• Do diversify and think long-term: A great finding from retirement giant Fidelity was that its best-performing accounts were from those who didn't even know they had an account! That just goes to show the power of sticking with it and not being swayed by day-to-day fluctuations. It's important to diversify across asset classes, including both stocks and bonds as well as thinking both internationally and domestically.

The Don'ts

• Don't be afraid of growth: It's tempting to think that a 401(k) is retirement savings, and that preserving your capital is priority No. 1. But the sad realities of American retirement planning are that Americans don't save nearly as much as they should and are woefully unprepared for expenses when they stop working. So keep that 401(k) in growth mode and don't be afraid of U.S. and international stocks. These investments may carry higher risk in the short term, but over many years they are a much more effective wealth-creation tool. Even if you're in your 40s or 50s, consider growth an important part of your portfolio. You could easily live to 80, 90 or even 100 … and you'll need to plan for that, or else risk running out of money.

• Don't treat your 401(k) like a checking account: You can indeed borrow against a 401(k), and sometimes when you're shopping for a loan like a mortgage, you will be told that your retirement funds are an asset. But it can be very costly to tap your 401(k). Not only will you pay penalties for withdrawals before age 59½, including loans that are not repaid, but you also will be out the much-needed cash come time for retirement. In an emergency, every other option should be exhausted before you dip into your retirement funds.

• Don't forget catch-up contributions: If you're behind on saving and getting close to retirement, remember that the IRS allows workers 50 or older to make an additional $6,000 in contributions for tax year 2015 above the $18,000 limit — so $24,000 in total. This isn't just a powerful catch-up tool — it also may be helpful for higher-earning empty-nesters looking to reduce their taxable income on the year via extra 401(k) savings.

• Don't ignore your (eventual) taxes: As a tax-deferred account, you actually don't have all the money you think you do in a 401(k). That's because when you withdraw funds, you will see that money taxed as ordinary income. In other words, if you are lucky enough to have a $1 million 401(k) account and take all that cash out at once? Well, it will be like you earned $1 million in wages that year — and you will pay the top tax amount as a result. Keep this in mind, and adjust your expectations of both what your total spendable amount is as well as your schedule for withdrawals in retirement.

• Don't forget RMDs: As a tax-deferred account, the government is happy to let you grow your money for a time … but it wants you to eventually take out that cash so the IRS can get its share. Once you reach age 70½, if you're no longer working then the tax man will prescribe "required minimum distributions" to ensure that happens. It involves a bunch of math based on your age, account balances and marriage status, so consult with a tax professional or review RMD worksheets on IRS.gov for guidance. If you don't take out the amount you should, expect the government to impose penalties anyway and get their fair share regardless.

• Don't be afraid to ask for help: You've worked hard, paid off a mortgage and sent the kids to college. Now you have a bunch of money saved in a 401(k) and are about to enjoy your golden years. But what kind of retirement do you want, and what kind of legacy do you want to leave your heirs? And most important, when and how do you start moving around your money to get there? These are important questions every family needs to ask, so there is nothing wrong with including an accredited financial professional in this process. Navigating the various tax laws and figuring out a long-term plan to enjoy your wealth is not a one-size-fits-all affair, and sometimes it's cheaper to pay a smart person to guide you instead of making an expensive mistake late in life.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor's Guide to Finding Great Stocks.