Today I wanted to discuss the two most popular retirement accounts, their advantages and disadvantages, and why you should care.

We’re going to look at the 401(k) retirement account, which is typically available to those working for bigger businesses and corporations, and the Roth IRA retirement account, which is typically used by self-employed or freelancing workers. The rules for these accounts are set by the US Government and may change after this article is published. Always check that you know the current rules before investing.

401(k)s are what we hear discussed the most. 401(k)s are typically offered by the company you work for. You can have a portion of your income contributed, before taxes, to your 401(k) retirement account. It’s important that I mention the ‘before taxes’ part, because that’s one of the biggest differences between a 401(k) and a Roth IRA. Because you contribute money to your 401(k) before it is taxed, you lower your taxable income for the year in which you contribute, which also possibly lowers your income tax bracket, saving you money at tax time.

Your employer may even match a portion or all of your contributions to your 401(k). If your employer will match your contributions, I highly advise you contribute up to the employer’s match, as this is free money every month. Your employer is not obligated to match contributions though, so not all of you will have this opportunity.

When you retire and begin taking distributions from your 401(k), those distributions are taxed at your future income tax bracket because you contributed the money pre-tax while you were working. So all of the wealth you’ve accumulated in your 401(k) will be taxed as you withdraw it after retirement. As you will soon see, this is another big difference between 401(k)s and Roth IRAs.

So what’s a Roth IRA?

Roth IRAs are retirement accounts you set up individually, outside of your employer. Roth IRAs are one of the few (but not only) retirement account options for self-employed workers. The money you contribute to a Roth IRA is after tax money. You’ve already paid income tax on this money. Because of this, when you begin taking distributions from your Roth IRA upon retirement, your distributions are tax free. You won’t pay a penny of tax on distributions of your original contributions nor the decades of growth and interest and dividends within your Roth IRA account. This is what makes Roth IRAs so attractive.

One drawback to the Roth IRA is the low annual contribution limit. You are only allowed to currently contribute $5,000 per year to your Roth IRA. And if you miss a year, or don’t contribute the full $5,000, you’re out of luck – you can’t make that time up. This is why it is so important to open and start contributing to a Roth IRA when you’re as young as possible. Even if you only put in $20/month, it’s better than nothing, and it’s time that you won’t be able to get back.

The later you start, the harder you have to work and the more you’ll have to save. By starting early, even with smaller amounts, your money will have more time to grow, compound interest will display its positive effect on your cash, and your nest egg will grow beyond belief. If you wait until you’re 40 to start, you’ll have to work five times as hard, for half the reward.

No one has retirement on the brain at 18 or 19 years old, but if I could change just one thing about my financial past, it would be starting a Roth IRA right out of high school instead of waiting until I was 25. I cannot stress this enough, knowing that 41% of my readers are under 18, and another 17% are under 24.

If you’re currently working for a company that offers a 401(k) plan, ask them about employer matches and start contributing. Then, whether your employer offers a 401(k) or you work for yourself, everyone is able to open a Roth IRA account. So do that. It doesn’t cost anything to get started, and you can contribute as much or as little as you can afford each month (up to the $5,000 annual limit).

Roth IRAs can be set up online at E*Trade (which is where mine is), T. Rowe Price and many other online brokerages. Don’t worry about what to invest in within your Roth IRA yet, just get it started, and start contributing. We’ll have plenty of time to talk about investment options later, or you can reread yesterday’s article for some brief overviews of the investment options available to you.

No one wants to retire to a restrictive budget and a menu of cat food. And you won’t have to, if you just start early, and contribute often.