Sounds boring? Get over that! Prioritizing retirement-saving is one of the best decisions you can make for your financial future. The younger you start, the more comfortable your finances will be when it's time to clock out of work for good.

Understanding 401(k) plans

A 401(k) is a retirement savings vehicle that's offered by employers. So pay attention at work, because if you have a chance to sign up, you won't want to miss out.

You decide how much of your pay you want to contribute, typically a percentage of your salary.

Your employer will transfer the money into the account before any taxes are withheld, and your savings are invested, most often in mutual funds made up of stocks and bonds. It's fun to watch how your money grows.

Contributions to a 401(k) throughout the year lower your taxable income, and some employers even match what you put in — up to a point.  

While there are limits on how much you can contribute each year, a 401(k) is a pretty painless way of saving for retirement that makes it difficult for you to spend the money you've set aside.

Take the money out early and you'll have to pay taxes, plus you may face a 10% penalty. "Early" means before age 59 1/2. Could they have made it more random? After you've reached that age, the withdrawals are taxed as regular income.

Whether you have assets or not, Facet Wealth will pair you with a CERTIFIED FINANCIAL PLANNER™ professional who will get to know your financial life story and recommend a financial plan.

Get started

How a Roth IRA is different

A Roth IRA (individual retirement account) is similar to a 401(k), though with the taxes flipped.

You put part of your income into the account after taxes have been taken out, and you pay no tax when you withdraw the money in retirement, not even on your investment earnings. 

This account can contain a variety of investments including mutual funds, bonds, stocks, securities and even certificates of deposit (CDs), just to name a few. As with a 401(k), a savings cap is applied on an annual basis.

If you really want your Roth IRA to feel like a 401(k), you can set up automatic contributions from your paycheck through direct deposit. 

You're eligible to save in a Roth IRA only if your income (either individual, or joint if you're married) is below a certain threshold. The limits change each year and can be found on the IRS website.

Similar to a 401(k), you may face a stiff, 10% penalty if you make early withdrawals from the account's earnings (though not your contributions). Again, "early" means before age 59 1/2. 

The bottom line

When it comes to deciding what type of retirement savings plan is better for you, take the proper time to consider the pros and cons of each type — especially the taxes — and make the choice that fits your financial situation and your goals.

Never overpay on Amazon again

Make sure to price-check online purchases with the help of Capital One Shopping. It’s totally free to use and takes less than a minute to set up.

Last year the service saved its customers over $160 million, and with just a few clicks you can start saving, too.

Download Capital One Shopping today and stop paying more than you have to for the exact same stuff.

About the Author

Mitchell Glass

Mitchell Glass

Freelance Contributor

Mitchell is a freelance contributor to

What to Read Next

Studies Say These Are the Worst and Best States to Retire

We boil down the results from multiple studies to rank all 50 states, from worst to first.

17 million Americans are missing out on free money — make sure you aren’t one of them

New legislation will help workers who aren’t yet cashing in get what they’re owed.

What is a traditional IRA? Everything you need to know

Maximizing your retirement savings could be as easy as one trip to the bank.

Is borrowing from a 401(k) a bad idea?

Before you raid your retirement account, you should know these loans are different.


The content provided on MoneyWise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.