How to Start Investing: The First Steps and Account Types

Start with a brokerage account or retirement account, depending on when you need the money

The first choice is not which stocks to buy. It is which account to hold them in. A brokerage account lets you buy and sell investments whenever you want, with no age restrictions or contribution limits—but you pay taxes on gains and dividends each year. A retirement account like a 401(k) or IRA delays taxes until you withdraw money in retirement, but locks your money away until age 59½ (with narrow exceptions). If you need the money before retirement, use a brokerage account. If you are saving for retirement decades away, a retirement account usually saves you more in taxes.

Most people start with whichever account their employer offers. If your employer has a 401(k) and matches contributions, that is almost always the better first move—the match is assistance programs. If you do not have an employer plan, or you have maxed out the 401(k), you can open an IRA (Individual Retirement Account) on your own through any brokerage. If you want to invest money that is not for retirement, open a regular brokerage account.

Key Takeaways

• A 401(k) or similar employer plan is usually the best first account because employers often match your contributions, and the money grows tax-deferred.
• An IRA is a retirement account you open yourself through a brokerage if you do not have an employer plan or want to save more than the 401(k) limit.
• A regular brokerage account has no contribution limits and no age restrictions on withdrawals, but you pay taxes on gains each year.
• You need a brokerage firm (like Fidelity, Vanguard, or Charles Schwab) to open any of these accounts; they hold your money and execute your trades.
• The account type matters more than which individual investments you pick, because the tax treatment and withdrawal rules shape your long-term returns.

How a 401(k) works if your employer offers one

A 401(k) is an employer retirement plan. Money comes out of your paycheck before taxes, so if you earn $50,000 and contribute $6,000 to your 401(k), you only pay income tax on $44,000. The $6,000 grows tax-free inside the account until you withdraw it in retirement. You do not pay taxes on the growth until you take the money out.

Many employers match a portion of what you contribute—often 50 cents or a dollar for every dollar you put in, up to a certain percentage of your salary. If your employer matches and you do not contribute, you are leaving assistance programs on the table. The match vests (becomes yours to keep) over time, usually three to five years, so if you leave the job before it vests, you forfeit the unvested portion.

In 2024, you can contribute up to $23,500 per year to a 401(k) (the limit changes yearly). If you are 50 or older, you can add an extra $7,500. The money stays locked until age 59½; if you withdraw before then, you pay income tax plus a 10% penalty, with some exceptions like hardship withdrawals or loans.

How an IRA works if you do not have a 401(k)

An IRA is a retirement account you open yourself through a brokerage firm. There are two main types: a Traditional IRA and a Roth IRA. With a Traditional IRA, contributions may be tax-deductible in the year you make them (depending on your income and whether you have a 401(k) at work), and the money grows tax-deferred. With a Roth IRA, contributions are not deductible, but the money grows tax-free and you can withdraw it tax-free in retirement.

For 2024, you can contribute up to $7,000 per year to an IRA (Traditional or Roth, combined). If you are 50 or older, you can add an extra $1,000. Unlike a 401(k), there is no employer match, so the money is entirely yours. You can withdraw contributions (not earnings) from a Roth IRA at any time without penalty, which makes it more flexible than a Traditional IRA if you need access to your money.

A Roth IRA has income limits—if you earn too much, you cannot contribute directly. A Traditional IRA has no income limit, but if you have a 401(k) at work, the tax deduction phases out at higher incomes. If you earn above the limit for a Roth and want to contribute anyway, you can use a "backdoor Roth" strategy, which involves contributing to a Traditional IRA and converting it to a Roth. This is legal but requires careful record-keeping.

How a regular brokerage account works for non-retirement investing

A brokerage account is a regular investment account with no contribution limits and no age restrictions. You can deposit as much as you want and withdraw it whenever you want. The tradeoff is that you pay taxes on dividends and capital gains each year, even if you do not withdraw the money.

This account is useful for money you might need before retirement, or for saving above the 401(k) and IRA limits. There is no employer match and no tax deferral, so the money grows slower than in a retirement account—but the flexibility is worth it if you need access.

How to open an account and what to expect

To open any account, you need to choose a brokerage firm. The major ones are Fidelity, Vanguard, Charles Schwab, E-Trade, and Merrill Edge, though there are many others. They all offer similar products and low or zero trading fees. Pick one and visit their website to open an account.

The application takes 10 to 20 minutes. You will need your Social Security number, date of birth, address, and employment information. The brokerage will ask what your investment goal is (retirement, general investing, education, etc.) and your risk tolerance. These answers help them suggest a default investment mix, but you can ignore the suggestion and pick your own investments.

After you open the account, you link a bank account and transfer money in. For a 401(k), your employer handles this—money is deducted from your paycheck automatically. For an IRA or brokerage account, you initiate the transfer yourself. Once the money is in the account, you can buy investments: individual stocks, mutual funds, exchange-traded funds (ETFs), or bonds.

The difference between stocks, mutual funds, and ETFs

A stock is a share of ownership in a single company. If you buy Apple stock, you own a tiny piece of Apple. Stocks are volatile—the price moves daily—and require research to pick individual winners.

A mutual fund is a basket of many stocks (or bonds) managed by a professional. You buy one share of the fund and own a piece of all the stocks inside. Mutual funds are less risky than individual stocks because they are diversified. Some are actively managed (a manager picks the holdings) and charge higher fees; others are index funds that track a market index like the S&P 500 and charge very low fees.

An ETF (exchange-traded fund) is similar to a mutual fund—it holds many stocks or bonds—but trades like a stock on an exchange. ETFs are usually cheaper than actively managed mutual funds and more tax-efficient in a regular brokerage account. For most beginners, a low-cost index ETF or mutual fund is simpler and less risky than picking individual stocks.

How much to contribute and where to start

If your employer offers a 401(k) with a match, contribute at least enough to get the full match. If they match 50% up to 6% of your salary, contribute 6%. That is the minimum to avoid leaving assistance programs behind.

After that, prioritize based on your situation. If you have high-interest debt (credit cards above 5%), pay that down first—the may provide return beats most investments. If you have an emergency fund (three to six months of expenses in a savings account), and you have paid off high-interest debt, then maximize your 401(k) or IRA contributions.

If you have money left after maxing retirement accounts and you do not need it for five or more years, open a brokerage account. If you might need it sooner, keep it in a high-yield savings account instead.

Frequently Asked Questions

Can I have both a 401(k) and an IRA at the same time?

Yes. You can contribute to both in the same year, as long as you stay within the annual limits for each. Many people do this: they contribute to their employer 401(k) to get the match, then max out an IRA for additional tax-deferred growth. The contribution limits are separate for each account type.

What happens to my 401(k) if I leave my job?

You have several options. You can leave it with your former employer (if the balance is above a minimum, usually $5,000), roll it into an IRA at a brokerage, or roll it into your new employer's 401(k) if they allow it. A rollover to an IRA gives you more investment choices and usually lower fees. Do not cash it out—you will owe income tax plus a 10% penalty.

Should I invest in individual stocks or index funds?

Most beginners should start with low-cost index funds or ETFs. They are diversified, require no research, and have lower fees. Individual stocks are riskier and require time to research. Once you understand how markets work, you can add individual stocks if you want, but many experienced investors stick with index funds for the bulk of their portfolio.

How do I know if I should open a Roth or Traditional IRA?

If you expect to be in a higher tax bracket in retirement, a Roth is usually better because you pay tax now at a lower rate. If you expect to be in a lower bracket in retirement, a Traditional IRA is better because you deduct contributions now. If you are unsure, a Roth is often the safer choice for younger people with decades until retirement, because tax rates may rise and you have time to recover from market downturns.

Can I withdraw money from my retirement account before age 59½?

From a Traditional 401(k) or IRA, early withdrawal triggers income tax plus a 10% penalty. Exceptions include hardship withdrawals, substantially equal periodic payments, and loans (401(k) only). From a Roth IRA, you can withdraw contributions (not earnings) anytime without penalty. If you think you might need the money, a regular brokerage account is more flexible.