← Back to Academy

What a 401(k) and a Roth IRA Are, and Why You Should Care Right Now

Your First Investment • Beginner Investing • 7 min

If your employer offers a 401(k) match and you're not contributing enough to capture the full amount, you are, in a very literal sense, leaving free money on the table. A 401(k) is an employer-sponsored retirement account: you contribute a portion of your paycheck (often with pre-tax dollars, reducing your taxable income right now), and many employers add a matching contribution on top — commonly something like matching 50% or 100% of what you contribute, up to a certain percentage of your salary. That match is additional compensation you simply don't receive if you don't contribute enough to earn it.

A Roth IRA works differently: it's an individual account (not tied to any employer), funded with money you've already paid tax on, in exchange for tax-free growth and tax-free qualified withdrawals in retirement. The core tradeoff between traditional (401(k) or IRA) and Roth accounts is simply WHEN you pay tax — now, or later — and which timing works better depends on your current versus expected future tax situation.

Insider Angle: the reason to "care right now," specifically at a young age, comes down to time: 10 extra years of compounding on contributions made in your 20s can end up worth more than a decade of additional contributions made starting in your 30s, purely because compounding accelerates the longer money stays invested. Contribution limits for these accounts are adjusted periodically (often for inflation), so always check the current, specific limit directly rather than relying on a number that might already be outdated.
Try This: If your employer offers a 401(k) match, check exactly what percentage you need to contribute to capture the FULL match. If you're contributing less than that amount, that's the single highest-priority change to consider making to your paycheck deductions.
Quiz

Master this lesson

0
/ 100

Correct moves you up, wrong moves you down — reach 100 to master this lesson.

Log in to save your progress and earn XP.

Related lessons

How to Open a Brokerage Account
The account itself is free at every major brokerage today — the actual decisions are which account type and what you do with it once it's open.
6 min • Beginner
How to Invest $100, and What It Could Become in 30 Years
$100 feels too small to matter — the math on what it can actually become over decades says otherwise, especially once you make it a habit rather than a one-time move.
6 min • Beginner
What Fees Do to Your Returns Over Time
A 1% annual fee sounds tiny — compounded over 30 years, it can quietly eat roughly a quarter of what your money would otherwise have become.
6 min • Beginner