The first step is choosing the account type that matches your work situation

A retirement account is a container the government lets you use to save money with tax advantages — you either pay taxes later (traditional accounts) or not at all on the growth (Roth accounts). Which one you open depends on whether you work for an employer, work for yourself, or both.

If your employer offers a 401(k), 403(b), or similar plan, that is usually the fastest route: your employer handles the setup, you choose how much to contribute from each paycheck, and the money moves automatically. If you are self-employed or your employer does not offer a plan, you open an account yourself through a bank, brokerage, or investment firm — a Roth IRA, traditional IRA, or SEP-IRA are the most common choices. If you have both employer coverage and self-employment income, you can have both types running at the same time.

Key Takeaways

  • Employer plans (401(k), 403(b)) are set up by your company; you enroll through payroll and contributions happen automatically from your paycheck.
  • IRAs you open yourself through a bank or brokerage; a Roth IRA is the simplest choice for most people starting out because withdrawals in retirement are tax-free.
  • Contribution limits change each year, and they are lower for IRAs than for employer plans, so check the current year's limit before you start.
  • You can open an account and make your first contribution in the same day if you use an online brokerage, but employer plans usually take one to two pay cycles to process.
  • The money you contribute does not have to go into stocks; you can hold it in a savings account, money market fund, or target-date fund while you decide what to do with it.

How to enroll in an employer plan

If your employer offers a retirement plan, the human resources or benefits department will give you enrollment materials — either on paper, through an employee portal, or both. You will choose a contribution amount (usually a percentage of your paycheck, like 3% or 5%), decide how the money is invested among the plan's fund options, and sign the enrollment form. That is the entire process.

The contribution amount takes effect on your next paycheck or the one after, depending on your company's payroll schedule. Your employer may also match a portion of what you contribute — for example, matching 50 cents for every dollar you put in, up to 3% of your salary. If your employer offers a match, contributing at least enough to get the full match is the fastest way to grow your account, because that money is free.

If you are unsure which fund options to choose, target-date funds are a common starting point. A target-date fund automatically adjusts its mix of stocks and bonds as you get closer to retirement, so you do not have to rebalance it yourself. The fund name usually includes a year — for example, "Target Date 2055" — which represents when you plan to retire.

Opening an IRA on your own

If you do not have an employer plan, you can open an IRA through almost any bank or brokerage — Vanguard, Fidelity, Charles Schwab, and many others offer them, as do most traditional banks. A Roth IRA is the simplest choice for most people: you contribute after-tax money (money you have already paid income tax on), the account grows tax-free, and you pay no taxes when you withdraw it in retirement.

To open one, visit the brokerage's website, click the button to open a new account, and answer basic questions about your name, address, Social Security number, employment status, and income. The whole process takes 10 to 15 minutes. Once your account is open, you can transfer money into it from your bank account and choose how to invest it — or leave it in a cash sweep account (a money market fund) while you decide.

A traditional IRA works differently: you contribute pre-tax money (reducing your taxable income that year), but you pay income tax on withdrawals in retirement. A traditional IRA makes sense if your income is high enough that you do not get a tax deduction for a Roth contribution, or if you expect to be in a lower tax bracket in retirement. If you are unsure which type fits your situation, a Roth is the safer default for someone just starting out.

Understanding contribution limits and deadlines

The government sets a maximum amount you can contribute to an IRA each year. For 2024, that limit is $7,000 for people under 50 and $8,000 for people 50 and older. For employer plans like 401(k)s, the limit is much higher — $23,500 for 2024 if you are under 50. These limits change each year, usually in January, so check your plan's website or your brokerage's website for the current year's number.

You can contribute to an IRA at any time during the year, but the deadline to contribute for a given tax year is April 15 of the following year (the same day federal taxes are due). For example, you can contribute to your 2024 IRA until April 15, 2025. Employer plans have no such deadline — you contribute during the year through payroll, and that is it.

If you contribute more than the limit allows, the excess is taxable and you may owe a penalty. Most brokerages will warn you if you are approaching the limit, but it is your responsibility to track it if you have accounts at multiple places.

Choosing how your money is invested

Once money is in your account, you decide what to do with it. The simplest choice is a target-date fund, which automatically shifts from stocks to bonds as you approach retirement. If you do not want to think about it, this is the right choice. The fund name tells you the target year — pick the one closest to when you plan to retire.

If you want more control, you can build a simple portfolio yourself using low-cost index funds. A common starting approach is to split your money between a total stock market index fund (like VTSAX or VTI) and a total bond market index fund (like VBTLX or BND), in a ratio that matches your age and risk tolerance — for example, 80% stocks and 20% bonds if you are in your 30s.

You do not have to invest the money immediately. Many people open an account, contribute money, and leave it in a money market fund or savings option while they learn more or decide on a strategy. The account grows slowly in cash, but there is no penalty for waiting, and you can move the money into investments whenever you are ready.

What happens after you open the account

Once your account is open and you have made your first contribution, you will receive statements — usually quarterly for employer plans and monthly or quarterly for IRAs, depending on the provider. These statements show your balance, how much you have contributed, and how much the investments have grown or declined.

You can change your contribution amount at any time. If you have an employer plan, contact your HR department or log into the employee portal. If you have an IRA, you can contribute more or less whenever you want, as long as you stay within the annual limit. You can also change how your money is invested — moving it from one fund to another — without any tax penalty, as long as the money stays inside the retirement account.

If you change jobs, your employer plan does not disappear, but you will no longer be able to contribute to it. You can leave the money where it is, roll it into your new employer's plan (if they allow it), or roll it into an IRA. A rollover is a direct transfer from one account to another and does not count as a withdrawal, so there are no taxes or penalties.

Common mistakes to avoid when starting out

The biggest mistake is not contributing enough to get your employer's full match, if one is available. If your employer matches 50 cents on the dollar up to 3% of your salary, and you only contribute 1%, you are leaving assistance programs on the table. Even if you are tight on cash, try to contribute at least enough to capture the full match.

Another common mistake is withdrawing money before retirement. Withdrawals from a traditional IRA or 401(k) before age 59½ are subject to income tax plus a 10% penalty, which can eat up a third or more of what you withdraw. Roth IRAs have more flexibility — you can withdraw your contributions (not the growth) without penalty at any time — but the account is designed for retirement, and early withdrawals defeat the purpose. If you think you might need the money soon, a regular savings account is a better place for it.

A third mistake is choosing investments that are too aggressive or too conservative for your timeline. If you are 30 years old and your money is in a money market fund earning 4%, you are missing decades of stock market growth. If you are 65 and your money is 100% in stocks, a market downturn could force you to sell at a loss right when you need the money. A target-date fund handles this automatically, which is why it is the right choice if you are unsure.

Frequently Asked Questions

Can I have both an employer plan and an IRA at the same time?

Yes. You can contribute to both a 401(k) and an IRA in the same year, as long as you stay within each account's contribution limit. However, if your income is above a certain threshold and you have an employer plan, you may not be able to deduct a traditional IRA contribution on your taxes. A Roth IRA has no such restriction, so it is usually the better choice if you have both.

What if I cannot afford to contribute much right now?

Start with whatever you can afford, even if it is 1% of your paycheck. The important thing is to start and let compound growth work over time. You can increase your contribution whenever you get a raise or your budget improves. Many people increase their contribution by 1% each year until they reach a comfortable level.

Do I have to invest the money in stocks?

No. You can hold your retirement account balance in a money market fund, savings account, or any other investment option your provider offers. However, money market funds and savings accounts earn much less than stocks over long periods, so most people in their 20s, 30s, and 40s benefit from holding at least some stocks. A target-date fund balances this for you automatically.

What if my employer does not offer a retirement plan?

Open a Roth IRA through a bank or brokerage. You can contribute up to $7,000 per year (for 2024) and the money grows tax-free. If you are self-employed, a SEP-IRA or Solo 401(k) allows you to contribute much more — up to 25% of your net self-employment income or $69,000 per year, depending on the type.

Can I move money from one retirement account to another?

Yes, through a process called a rollover. If you change jobs, you can roll your old 401(k) into your new employer's plan or into an IRA. If you roll it into an IRA, the money is not taxed and there is no penalty. A rollover is different from a withdrawal — the money moves directly from one account to another without passing through your hands.