The easiest and smartest way to guarantee a secure, comfortable retirement is to take part in your company's 401(k) retirement plan.

Yet many employees aren't taking full advantage of this critical benefit.

The concept is simple: A percentage of your income is withheld from your paycheck and deposited in your retirement account. Those contributions are invested in stocks and bonds -- usually through mutual funds.

Just follow our 7 simple rules for a successful 401(k) account and you'll make all the right decisions.

Rule 1. Choose a Roth 401(k) account if it's available.

The Roth 401(k) is new on the scene. Unlike traditional 401(k)s, your contributions won't be tax deductible.

But when you retire, none of your withdrawals are taxed, including all of the money you'll earn from capital gains (the increased value of your mutual fund holdings), interest and dividends.

Most families don't save that much by deducting 401(k) contributions -- about $350 for a family of four making the national median income of $42,300 a year and contributing $2,400 to a traditional retirement plan.

That advantage is more than offset by avoiding all taxes on your earnings, which will grow to become the majority of the money in your account.

It's especially important if you're in your 20s and 30s and not making nearly as much as you expect to later in your career.

"You lock away dollars now at your low tax rate that will be tax-free in the future," says Michael Kitces, director of financial planning at Pinnacle Advisory Group in Columbia, Md.

Rule 2. No Roth? Go traditional.

If your company doesn't offer a Roth 401(k) account yet, that's OK. Choose a traditional 401(k).

There's no need to wait. It's important to start saving for retirement now.

The difference: With a traditional 401(k), you pay no taxes on what you save or what you earn from your investments until you begin withdrawing money from your account.

When your company adds the Roth 401(k) to its menu, you can sign up and switch all future contributions to it.

All of your past contributions will remain in the traditional 401(k) and continue growing until retirement.

Rule 3. Start small and gradually increase your contributions.

The major reason employees don't take part in their company's 401(k) plan is a perfectly understandable reluctance to have more money withheld from their paychecks.

So start small by setting aside just 1% of your pay. You'll hardly notice 1%. We promise.

If you're contributing to a Roth 401(k), every dollar you contribute will be a dollar less in your paycheck.

But since traditional 401(k) contributions are not taxed, your take-home pay will only fall 65 to 90 cents for every dollar you put in your retirement account.

Let's say you're making $40,000 a year. Contributing 1% percent of your salary adds $8 a week to your retirement account, but only reduces your paycheck by $7 a week. If you're making $90,000, you'll be saving $17 a week but only see your take-home pay drop by $11.

"Not only are you doing what you have to," says Christopher Davis, an investment expert with Morningstar Inc., one of the best sources of independent investment research, "you're basically giving yourself a tax cut as well."

Once you've started contributing, your next goal should be to qualify for all the extra money your company is willing to put into your retirement account.

Recent changes to the laws governing 401(k) accounts encourage employers to match the first 1% of your savings dollar-for-dollar and then contribute 50 cents for each additional dollar you save up to 6% of your annual earnings.

That's an extra 3.5% you could be earning every year.

"If you don't contribute to your 401(k) you're simply leaving money on the table," says Davis.

Gradually set aside more money for your retirement plan by increasing your contribution 1% a month for the next five months. Too fast? How about an extra 1% every six months, or even every year?

The new rules allow you to sign up for automatic increases so you don't have to call or submit a form each time you want to boost your savings.

Your ultimate goal should be to keep pushing your contributions up a percent at a time until you're saving 10% of your income in your retirement fund.

A growing number of experts say you've got to save at least that much, over a significant number of years, to secure a comfortable retirement, especially if your 401(k) plan and Social Security are going to be your only sources of income.

Rule 4. Choose the right investment.

Another reason employees fail to sign-up is that they don't know what to do with their contributions.

Most plans require you to put your retirement savings in a mutual fund -- a type of investment that pools the savings of tens of thousands of employees to buy a broad range of stocks, bonds or both.

That's good, especially if you have little or no experience investing in stocks and bonds.

"A mutual fund gives you instant diversification," says Charles Simon, certified financial planner with Taconic Advisors Inc. of Fishkill, N.Y. "If you purchase stock independently in one company, you have one CEO working for you... Think of the headlines: 'CEOs get thrown in jail.' What if I pick the wrong CEO?"

But the dozens and dozens of mutual funds their retirement plan offers overwhelm many employees and they can't decide which one to pick.

Here's how to sort through all the choices and find a good mutual fund to start out with:

If your employer offers what's called lifecycle or target funds, choose the one designed for the approximate year you plan to retire.

The professional managers running these funds take greater risks with your money when you're young, buying a mix of stocks and bonds with the most potential to increase in price and boost the value of your 401(k) account. Of course those kinds of investments are the most likely to tumble if the market falls. But there's plenty of time for the market and your retirement savings to rebound.

As you get older, lifecycle funds adjust their mix of stocks and bonds to take fewer risks and ensure your money is there when you retire. Your account may not grow as fast, but it won't be as susceptible to downturns in the stock market, either.

According to a survey conducted by Burgess + Associates for John Hancock, people who contributed to a John Hancock Target-risk Lifestyle Fund from 2000 to 2004 experienced superior performance compared to those who selected their own investment options.

Over 91% of investors who picked their own funds would have experienced better performance if they had invested their money in a single lifestyle fund.

If your retirement plan doesn't offer a target or lifecycle fund, then invest in a mutual fund that buys shares in all the companies represented in a widely-watched measure or index of how the stock market's performing.

Index funds don't buy stocks that managers expect to outperform the overall market. They buy a broad range of companies on the assumption that stocks, as whole, become more valuable over time.

Historically, that's true. The Dow Jones Industrial Average, the best-known of those indexes, rose from 2,000 in the 1980s to a record-high of over 14,000 in 2007.

But the Dow only includes the stock of 30 large companies. Most experts would suggest a broader index fund that buys shares in the 500 large companies followed by the Standard & Poor's 500.

If neither of those options is available, then go for a traditional mutual fund that invests in a broad range of major corporations. The information sheets from your employer may refer to these as "large cap funds," using the financial industry's shorthand for capitalization.

If there's more than one large cap fund to choose from (and there probably will be) pick the one with the best 10-year average return. Yes, 10 years -- after all, you're in this for the long haul.

Why large caps?

"Many small companies are not as stable as larger companies," explains Jonathan Sard, a certified financial planner in Atlanta. "Some may have only been around a few years, or have limited earnings. So any deviation from those earnings can have an impact on their stock."

But once you've accumulated several thousand dollars in your large cap fund, and you've got the hang of how your 401(k) works, you should consider splitting your contributions to direct 40% into a small cap fund. When you've added several thousand more dollars to your account, you can try a 40-30-30 split and add a fund that invests in stocks outside the United States.

Rule 5. Don't invest in your own company.

The old adage, "Don't put all your eggs in one basket," definitely applies to your retirement plan.

Many employers will allow you to buy shares in your company as an alternative to investing in mutual funds. They'll also pay matching contributions with company stock.

But you're already dependent on your company for a paycheck, health insurance and -- if you're lucky -- a pension. Adding its stock your 401(k) plan makes you more vulnerable.

If your company collapses you could lose everything: your job, your benefits and your retirement.

Think of the folks at Enron. More than 4,000 employees lost their jobs when the energy-trading company filed for bankruptcy. Many also lost their life savings because they'd filled their retirement accounts with Enron shares.

Learn from their mistakes. Don't use your contributions to buy company stock and if you're given shares by your employer, sell them each time you've accumulated a few thousand dollars worth. Reinvest that money in your mutual funds.

Rule 6. Watch but don't touch.

You've done it; you've invested in a mutual fund. Way to go. Now let it grow.

It's time to sit back and let the professionals -- your fund manager -- work for you.

Mutual funds are long-term investments that will weather storms on the financial front if you just let them be.

In other words: be patient.

Don't calculate your fund's value every day, every week or even every month. Only look at your 401(k) plan, and how your mutual funds in it are doing, every quarter when you receive the statement.

Revel in the gains but don't panic over the losses. If it's down, let it be. Every fund goes down and rebounds when you're in it for the long haul.

Reacting to a down quarter, or two, by switching to a different fund will, most of the time, be counterproductive. Chances are you'll time the market incorrectly. You'll chase yesterday's winners.

"Look, but don't touch," warns Simon. "I find that being a cook, the best baked chicken is when I don't open the oven door at all. Let that portfolio bake in the oven, so to speak."

Rule 7. Don't borrow against your 401(k).

Yes, it's your money. And yes, you can borrow against it.

But no, it's not a good idea.

If you borrow money from your 401(k), that money is no longer working for you and your retirement. And then you've spent that money. And now you have to figure out a way to pay it back within a specified time, usually five years.

That's right: Even though you've essentially borrowed your own money, it must be paid back. Only this time, those aren't pre-tax contributions (which, by the way, you should still be making). You repay the loan from money in your checking or savings account.

If you don't pay it back, your loan will be considered a premature distribution -- and a premature anything is typically not good.

In the case of your 401(k) account, money withdrawn before you're 59 1/2 incurs a 10% penalty and you have to pay state and federal income taxes on the amount.

Also, if you change companies, you have to pay back any loans against your 401(k) before you leave your job. If you don't, your loan will automatically be considered a premature distribution.

Like we said, borrowing against your 401(k) is not good.

By Darci Smith

Interest.com Contributing Editor

Have a question about your finances? Ask us at editors@interest.com