Managing your 401(k)

NEW YORK (CNNMoney.com) -- The Dow Jones had its third worst day of the year on Friday. Add to that worries about the economy and estimates that by 2017, Social Security will start paying out more in benefits than it collects every year in taxes.

That makes your 401(k) plan even more vital to your retirement. We'll tell you how to effectively manage your 401(k) through your career.

It isn't an easy time to be in the market. But the best advice is to maintain a long-term view of your retirement accounts. Don't try to time the markets, says Frank Boucher of Boucher Financial Planning Services.

Forget the headlines. What you want to do is figure out what your asset allocation should be. If you are young, you'll have many years to weather the ups and downs of the stock market much better. So, you may want to hold more stocks in your portfolio. As you get older, that asset allocation may become more conservative.

Here's where you can go online to get a good sense of what your asset allocation should be www.cnnmoney.com. Click on personal finance and then calculators.

If you're anticipating getting a holiday bonus this year, one of the best things you can do is to increase how much you are contributing to your plan. As a rule of thumb, a young person should ideally be contributing 10 percent of his or her salary to a 401(k) plan, especially if there is an employer match.

As you age, you'll likely need to keep upping that percentage. To figure out if you are on track for saving, check out the Employee Benefit Research Institute's Web site at www.choosetosave.org. Here you'll be able to figure out how much you'll need to save to fund a comfortable retirement. The calculation takes into account social security benefits and earnings assumptions.

Remember, the worst thing you could do to your 401(k) is to tap into it too early. Not only will you be losing the value of compound interest, but you will have to pay income taxes and a 10 percent penalty if you withdraw funds before you are 59 and a half years old.

When you leave a job where you have a 401(k), you have a few options. If you have more than $5,000 invested, you can keep your 401(k) where it is. You'll want to do this if your old company has a good selection of low-cost funds.

You can also roll over your old 401(k) into your new employers plan. But make sure you do a direct rollover so you will avoid having to pay taxes. You also have the option of transferring your 401(k) money into an IRA. This may be advantageous if your new employer doesn't have a company match. In this case, you'll want to do a direct rollover or a trustee-to-trustee transfer.

Before you invest in an IRA, find out what fees and commissions you'll be responsible for in the IRA. You don't want to get a check written to yourself since you'll be paying taxes and a penalty on that amount.

If you find yourself falling on very hard times, there are occasions when you can take a loan or a hardship withdrawal from your 401(k). If you take out a loan, you will have to pay yourself back ...with interest of course.

That rate is usually the prime rate plus one percentage point. You have to pay the loan back in five years or you'll owe income tax plus a 10 percent penalty. And keep in mind, there's a double whammy here. You'll have to repay this loan with after-tax money AND Uncle Sam will tax you again when you take out the money.

To qualify for a hardship withdrawal where you don't have to pay the money back, you must have some very good reasons. These reasons may include un-reimbursed medical expenses, you are facing foreclosure, you're looking to buy your first home or you have to pay for college, funeral costs or housing repairs. Again, this should really be a last option.