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But the biggest advantage of 401(k)s is the employer match: Many companies match at least a part of what their workers set aside for retirement. IBM, for example, currently matches employee contributions dollar for dollar up to 6% of their income! Most company matches aren't so generous, but they're still worth taking full advantage of. In effect, you can give yourself a raise by taking advantage of the employer match—though you won't see the effects of the "raise" until you retire.

Disadvantages of 401(k)s

Alas, 401(k)s aren't perfect. For one thing, once you put money into a 401(k), you can't easily access the cash if you end up needing it for something else. Except in cases of hardship (see http://tinyurl.com/401k-hsw), if you pull the cash out before age 59 and a half, you'll be socked not only with taxes, but also a 10% early withdrawal penalty. (On the other hand, you have to begin pulling money out by the time you're 70 and a half, unless you're still working for the company that sponsored the plan.)

Also, find out the details of your company's vesting policy. Vesting is the process by which you gain "ownership" of any contributions your company makes to your 401(k) (as with an employer match). You always own the money you've put into the plan yourself, but you only gradually gain ownership of your company's contributions. You might own none of them during the first year you participate, for example, 20% the second year, and so on. If you leave the company before you're fully vested, you won't get 100% of the money they contributed. Check with your company's HR department to learn more.

But the biggest problem with 401(k)s is that they often offer only limited investment options. The firm that manages your company's retirement accounts probably gives you a small menu of mutual funds from which to choose. Your challenge is to find the one best suited to your needs (which, as you learned in the last chapter, is likely to be the lowest-cost fund; favor index funds, if possible).

If your company's 401(k) plan is lousy (it has high fees and poor selection, say), move the money into an IRA (Learning to Love Roth IRAs) when you leave the company. But no matter how bad the plan, it's probably not bad enough to pass on the employer match. For more info on how to deal with a bad 401(k) plan, read this article from Money magazine: http://tinyurl.com/bad401k.

Every company's 401(k) plan is different. Your best bet is to read up on how yours works and do what you can to make the most of it. And whether or not your company offers a 401(k), you should definitely take a look at the investor's best friend: Roth IRAs.

Tip

At some point, you may want to shift money from one retirement account to another, like moving the money in a 401(k) from your old job to a Roth IRA. (The technical way to say this is that you want to roll over your 401(k).) Be warned: These moves can be tricky. The IRS has a handy chart that shows which accounts can roll over into other accounts: http://tinyurl.com/IRS-ropdf. For more info, read the Get Rich Slowly article at http://tinyurl.com/GRS-401kmove and contact a financial planner (see How to open a Roth IRA account).

Learning to Love Roth IRAs

Even if your company doesn't offer a retirement plan, you can still save for the future. One of the best ways to do so is with a Roth IRA.

An IRA is an individual retirement arrangement, a retirement plan that gives you tax advantages when saving for retirement. There are two types of IRAs:

With a traditional IRA (first introduced in 1975), the money you put in is typically tax deductible, but the money you pull out at retirement will be taxed at the then-current rate.

With a Roth IRA (first introduced in 1997), you contribute after-tax dollars, but when you retire, you don't have to pay taxes on the returns the money earned. (These IRAs get their name from Delaware senator William Roth, who helped pass the law that created them.)

In other words, money in a traditional IRA is taxed when you