Traditionally, a 401k is an employer-sponsored retirement plan made available to employees. It is a tax-advantaged plan that is geared to help you save money for retirement.
A traditional 401k defers taxes until you draw money out of the account. In simple terms, your employer will take money from your paycheck and invest it in your traditional 401k before any taxes are paid to the government.
A tax-exempt 401k is referred to as a Roth 401k. While not “truly exempt” from all taxes, a Roth pays taxes upfront, but nothing on the gains or withdrawals. When you invest money in a Roth, you invest after-tax money in this account.
- Using your 401k to pay off credit card debt
- Using your 401k to pay off student loans
- Using your 401k to purchase a car
- Borrowing from your 401k to pay off your mortgage or buy a house
If your 401k plan is sponsored by your current employer, you can not access this money until you leave employment or suffer a major hardship. If you have an old 401k plan from a previous employer, you can cash this out or take the cash back from it – but you may be subject to an early withdrawal penalty.