Saving for retirement is partly about how much is set aside and partly about where it is kept. In the United States, special accounts offer tax advantages to people who save for old age. The two most important are the 401(k), offered through employers, and the individual retirement account, or IRA.

The 401(k)

A 401(k) is a retirement plan sponsored by an employer. Workers choose a percentage of each paycheck to contribute, and the money is invested, usually in mutual funds selected from a menu the plan provides. The name comes from a section of the U.S. tax code. Many employers match part of what workers contribute, for example adding 50 cents for every dollar up to a set share of salary. A match is effectively free money, and financial advisers generally recommend contributing at least enough to receive all of it.

The IRA

An IRA is an account that an individual opens on their own at a bank or brokerage, with no employer involved. Anyone with earned income can contribute, including teenagers with part-time jobs. IRAs have lower annual contribution limits than 401(k) plans, but they offer a much wider choice of investments. Many people use both: a 401(k) to capture the employer match, and an IRA for additional savings or to hold money moved from an old employer’s plan.

Traditional vs. Roth

Both types of account come in two versions, and the difference is when taxes are paid. With a traditional account, contributions are generally made before tax, which lowers this year’s tax bill. The money grows untaxed, and withdrawals in retirement are taxed as income. With a Roth account, contributions are made with money that has already been taxed. There is no deduction today, but the money grows tax-free and qualified withdrawals in retirement are not taxed at all. A Roth tends to favor people who expect to be in a higher tax bracket later, which is why it is often recommended for young workers.

The Rules

The tax benefits come with conditions. The government sets yearly limits on contributions and adjusts them over time. Money withdrawn before age 59 and a half is generally subject to income tax and a 10% penalty, with some exceptions. Traditional accounts also require withdrawals to begin once the owner reaches their seventies. These rules are meant to keep the money invested for decades, which is exactly what allows compound growth to work.

Conclusion

Retirement accounts are containers, not investments. What matters is both using them and choosing sensible investments inside them. The tax savings can add up to a very large sum over a working lifetime. The most valuable ingredient is time. Someone who starts contributing in their early twenties, even in small amounts, gives their savings decades longer to grow than someone who waits.