Retirement might feel far away, especially early in your career, but the accounts you choose today can make a significant difference decades from now — mainly because of how much time your money has to grow. This guide breaks down the two most common retirement accounts in the U.S. and how to choose between them.
What Is a 401(k)?
A 401(k) is a retirement account offered through your employer. You contribute a portion of your paycheck before it's taxed (in the traditional version), which lowers your taxable income now. Many employers also offer a match — for example, matching 50% of what you contribute up to a certain percentage of your salary. This match is essentially free money, so it's usually the first place to direct retirement savings.
What Is an IRA?
An IRA (Individual Retirement Account) is opened independently, not through an employer, at a brokerage of your choice. There are two main types:
- Traditional IRA: Contributions may be tax-deductible now; you pay taxes when you withdraw in retirement.
- Roth IRA: Contributions are made with after-tax money, but withdrawals in retirement are tax-free, including all the growth.
Roth vs. Traditional: Which Should You Choose?
The core question is: do you expect to be in a higher tax bracket now or in retirement? If you're early in your career and likely earning less than you will later, a Roth account can be especially valuable, since you lock in today's lower tax rate and let decades of growth happen tax-free. If you're in a high tax bracket now, a traditional account's upfront deduction may be more valuable.
A Simple Order of Priority
- Contribute enough to your 401(k) to get the full employer match — this is an immediate, guaranteed return.
- Max out a Roth IRA if you're eligible, for the flexibility and tax-free growth.
- Go back to your 401(k) and contribute more, up to the annual limit, if you have money left to save.
Why Starting Early Matters So Much
Because of compound growth, money contributed in your 20s has significantly more time to grow than the same amount contributed in your 40s. Even modest, consistent contributions early on can outperform larger contributions started later. If your employer offers automatic escalation (increasing your contribution percentage each year), it's often worth turning on.
Common Mistakes to Avoid
- Leaving employer match money on the table by contributing too little.
- Cashing out a 401(k) early when changing jobs, which triggers taxes and penalties.
- Waiting to start "until you earn more" — starting small now is usually better than a larger amount much later.
You don't need to have it all figured out on day one. The most important step is simply starting — even a small percentage of your paycheck going toward retirement builds a habit that compounds, literally, over time.