404 Pages and SEO
It is a good idea to make sure that your site is returning 404 code and not a 200 (everything is fine) code with your custom 404 page as otherwise search engines are likely to think the 404 needs to be indexed. Which obviousely you do not want.
How exactly you do this on your particular web set up is beyond the scope of this page but some good books such as
Saving "link juice" with 404s
It is tempting to try and "rescue" what some people call "link juice" from being wasted on your 404 page by redirecting links to the home page. This is not such a hot idea as it is SEO at the cost of good user experience. As 404 errors should be mercifully rare this is often a price not worth paying.
Better would be to look the refering page(s) that cause 404 errors to be triggered and if there is a badly written in bound link you can redirect that specific link somewhere more appropriate thus improving user experience and SEO at the same time.
404 is code for File Not Found - 404 pages are good for having fun with.
Even more about this brill topic.