On this page you will learn the basics of common retirement accounts like 401(k)s and IRAs, and how they fit into your overall investing plan.
What is a 401(k) account?
A 401(k) is a special brokerage account that has tax advantages and often includes an employer match. Usually, when you enroll in your 401(k) plan, you automatically buy an index fund that mixes stocks and bonds every time your contribution is taken from your paycheck.
Many people do not realize that their 401(k) is invested in the stock market. If you want to see what you are invested in, look for the “My Investments” or similar tab on your 401(k) website. There you will see the name of the index fund or funds you are buying.
Types of 401(k) accounts
There are two main types of 401(k) accounts: a regular (pre‑tax) account and a Roth (post‑tax) account. The main difference between them is when you pay income tax on the money.
A regular 401(k) is usually the default when you enroll in your company’s plan. Your retirement contributions go in before you pay taxes, which means you get a tax break now, but you will pay income tax on withdrawals in retirement.
A Roth 401(k) takes your contributions after you pay taxes. You do not get a tax break today, but qualified withdrawals in retirement are tax‑free.
If you expect to earn less money in retirement than you do now, a regular (pre‑tax) 401(k) may be a better fit. If you expect to earn the same or more in retirement, a Roth 401(k) can be attractive because your withdrawals will not be taxed.
For example, if you retire and withdraw $50,000 per year from your 401(k), and also earn $40,000 from work, your total taxable income would be $90,000. That total is what determines your tax bracket.
What is an IRA account?
An Individual Retirement Account (IRA) works similarly to a 401(k) in that it is a tax‑advantaged account meant for retirement investing. The key difference is that IRAs are private: there are no employer contributions, and you can open an IRA with almost any bank or brokerage on your own.