Video Lesson
Prefer watching? This video covers the key concepts from this article.
Why Retirement Accounts Matter
Retirement accounts are among the most powerful tools available to investors. They offer significant tax advantages that let your money grow faster than in a regular brokerage account. The earlier you start, the more time compounding has to work in your favor.
The 401k
A 401k is offered through your employer. Contributions come out of your paycheck before taxes, reducing your taxable income today. The 2024 contribution limit is $23,000 ($30,500 if you're 50 or older). If your employer offers a match, always contribute enough to get the full match — it's an instant 50–100% return.
Traditional IRA vs Roth IRA
An IRA is an individual retirement account you open yourself. The key choice is Traditional vs Roth. Traditional gives you a tax deduction now and you pay taxes on withdrawal. Roth gives you no upfront deduction but all qualified withdrawals in retirement are tax-free. The 2024 IRA limit is $7,000 ($8,000 if 50+).
Roth IRA Math
Investing $500 a month in a Roth IRA at a 7% average return for 30 years grows to over $567,000 — and you owe zero taxes on the gains at withdrawal.
Priority Order
- Contribute to 401k up to the employer match
- Max out a Roth IRA
- Return to 401k up to the annual limit
Low-cost index funds are the best default investment for both account types.