Sign Up For Your 401(k)

If you want to ignore everything I say on this site, I can't stop you.

Just don't forget this…

You probably know someone whose retirement savings took a big hit last year, but if your company offers you a 401(k) plan with any kind of matching funds, contributing to it is the smartest thing you can do with your money. Once you get whatever match you're entitled to get, consider other tax-favored retirement savings plans like individual retirement accounts (IRAs).

Don't let the word "retirement" fool you. You can almost always borrow or withdraw money from these plans to pay for college bills, first homes, and medical emergencies—and you can pull money you put in a Roth IRA at any time. Basically, think of your IRA and 401(k) as smarter savings accounts.

  1. What's so great about retirement accounts?

    The great thing about IRAs and 401(k)s is that they allow your money to grow faster than it would otherwise. That's because these retirement plans don't require you to pay tax on the earnings while your investments are growing. (Unlike a bank account, in which you need to pay tax on the interest you earn.) When money is able to grow free from tax for many years, it grows exponentially. In financial circles, tax-free compounding has been called the eighth wonder of the world. (Financial types don't get out very much.)
  2. Max out your 401(k)

    Many companies match the amount you contribute to a 401(k), up to a set limit. Generous employers may offer a dollar-for-dollar match, up to 3% or more of your salary. That's an immediate guaranteed 100% return on your investment, and it translates into the best deal in investing. Even when the financial markets are suffering, that 100% return can turn an otherwise horrific loss into a gain.

    You get to decide how you want your 401(k) money to be invested. Most companies offer you a dozen or even more investment options to choose from. Some companies will even automatically enroll you in their 401(k).

    Do your best to contribute at least what your company will match. Beyond that point, the tax advantages in a 40(k) still make this a good place to put your money, but you might also want to consider opening an IRA (see below) because those accounts tend to be more flexible when it comes to getting your money out before you retire.

    If you're a really dedicated saver, the maximum before-tax contribution you can make to a 401(k) this year is $16,500. (Your maximum may be less, depending on your situation, so check with your company benefits office.)

    For a small fee, you can get advice on how to invest your 401(k) at financialengines.com.
  3. Open an IRA

    An IRA is a tax-favored retirement account that you set up yourself. Whether or not you have a 401(k), make sure you open an IRA.

    Here's the deal: Basically you can contribute up to $5,000 a year to this account. Because IRAs enjoy special tax status, your money will grow faster than it could virtually anywhere elseChoose a Roth (probably) There are two main types of IRAs: Traditional IRAs and Roth IRAs. (There's also a Roth version of 401(k)s, but so far only 30% of companies offer them.) The difference between Roth and traditional is in the type of tax breaks they offer. For most young people, Roth IRAs and 401(k)s are the most appealing, but there are exceptions. You can open an IRA at a brokerage firm, bank, or mutual fund company. My advice is to go with the mutual fund company. To learn what a mutual fund company is, why I like them, and which ones I like the best, go to Invest for Your Future. with the exception of a 401(k) with matching. If you put the maximum into your IRA each year starting at age 24, for example, you could have well over $1,000,000 by the time you retire. Not too shabby.

    Where IRAs shine is that it's easier to get at your money for education, medical expenses, or to buy a house. With one type of IRA, you can withdraw money you contributed at any time.
  4. Choose a Roth (probably)

    There are two main types of IRAs: Traditional IRAs and Roth IRAs. (There's also a Roth version of 401(k)s, but so far only 30% of companies offer them.) The difference between Roth and traditional is in the type of tax breaks they offer. For most young people, Roth IRAs and 401(k)s are the most appealing, but there are exceptions.

    You can open an IRA at a brokerage firm, bank, or mutual fund company. My advice is to go with the mutual fund company.

    To learn what a mutual fund company is, why I like them, and which ones I like the best, go to Invest for Your Future.