401(k)

Contributions and earnings in a Roth 401(k) can be withdrawn if you are at least 59½ and have had your account for at least five years. If you withdraw from your 401(k) before then, you’ll have to pay income tax on the amount you withdraw as well as a 10% IRS tax penalty on some of the amount. Withdrawals can be made without penalty if you become disabled or by a beneficiary after your death.

If your company offers an employer-sponsored retirement plan, chances are it’s a 401(k). If you’re lucky, your employer might even match some of your contributions to that account, meaning you get free money added to your retirement savings. The average match by employers was 4.5%, according to Vanguard's annual report on investing behavior.

Withdrawing early from your 401(k) should be a last resort. If you withdraw money from your 401(k) before retirement, you’re going to encounter some fees and penalties, not to mention impact your retirement savings. Knowing this, you should do everything in your power to reduce your debt in other ways, like negotiating with your credit companies, or taking out a loan from your 401(k). This way, you pay the money back to your retirement account without losing the money in your account.

Contributions made to traditional 401(k)s and other qualified retirement plans are made with pre-tax dollars, so they are deductible from your taxable income. This works out in your favor, as the money you contribute to your 401(k) actually shrinks your total income for the year, in turn slightly reducing your taxes as well. However, there are limits to how much you can contribute to these plans. For 2021, the limit is $19,500, and in 2022 the amount goes up to $20,500.

There are several options of what you can do with your 401(k) after you leave your job. If the account has more than $5,000 in it, most plans allow you to leave it where it is. Alternatively, you can roll the balance over into your new 401(k) at your new job. This is beneficial because then your interest is still compounding on the whole amount, instead of compounding on two smaller amounts in two different 401(k)s. Lastly, you can choose to cash out your 401(k), though this is usually not recommended as you’ll have to pay fees and penalties on the amount and you will lose out on retirement savings.