I hope that most people reading this already have retirement accounts setup, since that would mean I don’t have to worry about my friends and readers becoming old and poor and unable to support themselves. But seriously, there are a few things that people can do to make sure they are doing all of the right things for their retirement accounts. This article is going to cover all of the things you should do if you haven’t already, and can also act as a checklist when you start a new job and want to get everything setup with your new paycheck. While I’ve been doing this for close to a decade, in the mean time a site has popped up that documents this process fairly well, so if you want to see a nice diagram and watch a youtube video explaining it, check out IWillTeachYouToBeRich.com.

In this article we’ll walk through the setup of:

• 401(k)
• (Roth) IRA

The first, and in my opinion, most important retirement account to setup is your 401(k). I know that most people have at least heard of this, but many may not have set it up because they don’t fully understand it. The 401(k) has two huge benefits of it, free money and saving you on taxes. Yes, I said free money, which is rare in this world, so when you get an opportunity for it, you should take it. How does it work? Well, your employer matches a certain percentage of your contribution to your account. I should say, that your employer CAN match them, and that’s something you should verify ahead of time. A 401(k) still has benefits if your employer doesn’t match your contribution, and we’ll cover those next. Most employer’s that I have worked for seem to like the number 6 when it comes to 401(k) matching. That is to say they will match a certain percentage of your contribution up to 6% of your paycheck, and the amount they match is usually determined by how long you have worked at the company.

I can probably best explain with an example. Let’s say you have a salary of $50,000, and you decide to contribute 6% of your paycheck to your 401(k). Over the course of one year, you will have contributed $3,000, and if your employer matches 100%, they will have also put $3,000 in your account over the same time period. Do you see what I mean now about free money? In a way, it’s as if you were given a $3,000 raise, or more accurately, your salary has really always been $53,000, so long as you take advantage of your employer’s matching plan.

The second benefit of contributing to your 401(k) is reduced taxes. Let’s use the same simple example with your salary of $50,000 and your 6% contributions. When it comes time to pay your income taxes, instead of paying based on a salary of $50,000, you will instead be paying based on $47,000. (Your salary MINUS your 401(k) contributions.) This may not seem like that much, but when you do the math, in this example, you would save $50 per month in taxes. This will vary by your state’s tax rate, and also remember, if your salary is more than $50,0000 than you will be saving even more. I suggest taking a look at some online web calculators that can do the math for you.

The good news is you haven’t set up your 401(k) yet, is that it’s usually a quick and painless process if you work for a large enough company that offers it. I recommend going to your HR department’s web site, or emailing your HR rep to find out who handles your company’s 401(k). There’s a good chance its handled through a company like Fidelity or Vanguard, and everything can be done via their web site in just a few minutes. I’m not going to go into what to invest in your account, other than if you don’t know, go with an index fund.

So the wrap-up on 401(k) is that it takes 3 easy steps:

1. Sign up via your company’s HR website
2. Pick how much you want to contribute (usually 5-10%)
3. Pick your investments (Usually from a small list of choices

The other type of retirement account to setup ASAP is the Roth IRA. If you don’t already have an IRA, or a brokerage account of any kind, it may be best to open up the IRA account with whomever your new 401(k) will be with. This is totally a matter of preference, as you may wish to take advantage of some of the promotional deals that a company like eTrade or ING offers, usually a $50 deposit bonus or something along those lines. Most companies will offer the same thing when it comes to stocks, but where the differences begin to show is in their offerings of mutual funds and bonds. If this matter’s to you, do your research before opening the account. If it doesn’t and you’ll just be investing in a nice low-fee index fund, then go with what’s easiest for you.

Once you get the account open, immediately set up an automatic deposit schedule. Any broker you choose should be able to set this up in a few seconds via their web site and your checking account info (account and routing number). Try and deposit as much you can per week until you reach your annual limit. The current limit is $5,000 per year, but not long ago it was as low as $2,000, so make sure to pay attention each year to see if the limit is increased. Whomever you choose as your IRA broker will probably send you an email if the limit is raised.

I’ve explained the benefits of the 401(k), but not the Roth IRA yet. Similar to the 401(k), the IRA has tax benefits, but a much different kind of benefit. One that you won’t actually benefit from until you retire, because the tax benefit of a Roth IRA is that you don’t pay taxes on any of the gains you will make. For example, if you deposited $5,000 at age 25 (we’ll pretend this is the ONLY deposit you ever made), and when you reach age 65 you decide to withdraw your money. Also for example, we’ll say you earned an average of 10.27% annual return rate. In this case, you will have $250,000 in your account, and can withdraw it all and pay no taxes on it. Does this sound too good to be true? It may, but it is true. The truth is that you paid taxes on your original $5,000 already, and by putting it into the Roth IRA, you agree to keep it there until you are at least 59.5 years old, or you face penalties and taxes.

So that’s the minimum. If you do these two things, you will be way ahead of most other Americans, and much better off when it comes time to retire. If you have any questions about anything in the article, feel free to post them in the comments, and I will get back to you with an answer.