How to start investing depends on what you're investing for and how much risk you can handle
Investing means putting money into something — a stock, a bond, a fund, real estate — with the goal of growing it over time. Before you pick what to invest in, you need to decide where to hold those investments: a brokerage account, a retirement account, or both. Each type of account has different rules about how much you can put in each year, how the money grows tax-wise, and when you can take it out without penalty. The account you choose matters as much as what you buy inside it.
The simplest path for most people starts with opening a brokerage account at a bank or investment firm, then deciding whether a retirement account makes sense for your situation. A brokerage account has no contribution limits and no restrictions on when you withdraw — you pay taxes on gains when you sell. A retirement account (like a 401(k) or IRA) lets your money grow tax-deferred or tax-free, but you face penalties if you withdraw before age 59½. The right choice depends on whether you're saving for retirement, a shorter-term goal, or both.
Key Takeaways
- A brokerage account has no contribution limits or withdrawal restrictions, but you pay taxes on investment gains each year.
- Retirement accounts like 401(k)s and IRAs offer tax advantages but penalize withdrawals before age 59½, with some exceptions.
- If your employer offers a 401(k) match, contributing enough to get the full match is usually the first step before opening other accounts.
- An IRA (Individual Retirement Account) lets you invest on your own if you don't have access to an employer plan or want to save more.
- You can use both a retirement account and a brokerage account at the same time for different savings goals.
Brokerage accounts: no limits, but you pay taxes on gains
A brokerage account is an investment account you open directly with a bank, investment firm, or online broker. You deposit money, buy stocks, bonds, mutual funds, or exchange-traded funds (ETFs), and sell them whenever you want. There is no annual contribution limit — you can put in $100 or $100,000 in a single year. You can withdraw money at any time without penalty.
The trade-off is taxes. When you sell an investment for a profit, you owe capital gains tax on the difference between what you paid and what you sold it for. If you held it less than a year, it's taxed as ordinary income at your regular tax rate. If you held it a year or longer, it's taxed at the lower long-term capital gains rate (0%, 15%, or 20% depending on your income). You also owe taxes on dividends and interest the investments earn each year, even if you don't sell anything. A brokerage account makes sense if you're saving for something other than retirement — a house down payment, a car, a vacation — or if you've already maxed out your retirement account contributions.
401(k) plans: employer-sponsored retirement savings with a match
A 401(k) is a retirement account your employer offers. You choose how much to contribute from each paycheck (up to a limit set by the IRS each year), and the money goes in before income tax is calculated. That means your taxable income drops, which lowers your tax bill. The money grows tax-deferred — you don't pay taxes on gains, dividends, or interest until you withdraw it in retirement.
Many employers offer a match: they contribute money to your 401(k) based on how much you contribute. A common match is 50% of what you contribute up to 6% of your salary — meaning if you earn $50,000 and contribute $3,000 (6%), your employer adds $1,500. That's information programs, and it's one of the strongest reasons to use a 401(k) if one is available to you. You become vested (meaning the match is truly yours) on a schedule set by your employer, usually over three to five years.
The IRS sets an annual contribution limit for 401(k)s — in 2024 it was $23,500 for people under 50, and $31,000 for people 50 and older (these limits change yearly). When you leave a job, you can roll the 401(k) balance into an IRA to keep it invested, or leave it with your former employer's plan if the balance is large enough. You cannot withdraw money before age 59½ without paying a 10% penalty plus income tax, with narrow exceptions like hardship withdrawals or loans against your balance.
Traditional and Roth IRAs: individual retirement accounts with different tax treatment
An IRA (Individual Retirement Account) is a retirement account you open on your own, not through an employer. There are two main types: Traditional and Roth, and they differ in when you pay taxes.
With a Traditional IRA, contributions may be tax-deductible in the year you make them (the rules depend on whether you have access to a 401(k) at work and your income level). The money grows tax-deferred. When you withdraw in retirement, you pay income tax on the full amount. You must start taking withdrawals at age 73 (as of 2023; this age has been rising). The annual contribution limit for 2024 was $7,000 for people under 50, and $8,000 for people 50 and older.
With a Roth IRA, contributions are made with after-tax dollars — you don't get a tax deduction. But the money grows tax-free, and withdrawals in retirement are tax-free too. There is no requirement to take withdrawals at any age. The contribution limit is the same as a Traditional IRA, but there are income limits: if you earn above a certain threshold (which varies by year and filing status), you cannot contribute to a Roth directly. A Roth makes sense if you expect to be in a higher tax bracket in retirement, or if you want tax-free growth and flexibility.
You can have both a Traditional IRA and a Roth IRA, but your total contributions across both cannot exceed the annual limit. If you have a 401(k) at work, you can still open an IRA, though the tax deduction for a Traditional IRA contribution may be limited.
SEP-IRAs and Solo 401(k)s: for self-employed people and small business owners
If you're self-employed or own a small business with no employees (other than a spouse), you have retirement account options with higher contribution limits than a regular IRA.
A SEP-IRA (Simplified Employee Pension IRA) lets you contribute up to 25% of your net self-employment income, with a maximum of $69,000 in 2024. Contributions are tax-deductible, and the money grows tax-deferred. It's straightforward to set up and has minimal paperwork. The downside is you can only contribute as an employer (based on business income), not as an employee, so you can't make catch-up contributions if you're over 50.
A Solo 401(k) (also called a self-employed 401(k)) lets you contribute both as an employee and as an employer, which can result in higher total contributions — up to $69,000 in 2024, or $76,500 if you're 50 or older. It requires more paperwork and record-keeping than a SEP-IRA, but offers more flexibility and the option to borrow against your balance. You can also choose between Traditional (tax-deferred) and Roth (tax-free growth) treatment.
Comparing accounts: when to use each one
| Account Type | Best For | Contribution Limit (2024) | Tax Treatment | Withdrawal Rules |
|---|---|---|---|---|
| Brokerage Account | Short-term goals, money you might need soon | None | Pay taxes on gains and dividends each year | Withdraw anytime, no penalty |
| 401(k) | Retirement, especially if employer offers a match | $23,500 (under 50); $31,000 (50+) | Tax-deferred (Traditional); tax-free (Roth) | Age 59½ without penalty; required withdrawals at 73 |
| Traditional IRA | Retirement, tax deduction now | $7,000 (under 50); $8,000 (50+) | Tax-deductible contributions; tax-deferred growth | Age 59½ without penalty; required withdrawals at 73 |
| Roth IRA | Retirement, tax-free growth, flexibility | $7,000 (under 50); $8,000 (50+) | After-tax contributions; tax-free growth and withdrawals | Age 59½ without penalty; no required withdrawals |
| SEP-IRA | Self-employed, high income, simplicity | Up to 25% of net self-employment income; max $69,000 | Tax-deductible contributions; tax-deferred growth | Age 59½ without penalty; required withdrawals at 73 |
| Solo 401(k) | Self-employed, want higher contributions and flexibility | Up to $69,000 (under 50); $76,500 (50+) | Traditional or Roth option available | Age 59½ without penalty; can borrow against balance |
A practical order for most people: first, open a 401(k) at work and contribute enough to get the full employer match (that's information programs). Second, if you have more to save and want retirement tax advantages, open an IRA and contribute up to the annual limit. Third, if you still have money left over or you're saving for a non-retirement goal, open a brokerage account. This approach balances tax advantages with flexibility.
How to open an account and what you'll need
Opening a brokerage account takes 10 to 20 minutes online. You'll need your Social Security number, a government ID, your address, and a bank account to link for deposits. Most brokers (Fidelity, Vanguard, Charles Schwab, E-Trade, and others) have no minimum deposit, though some funds or investment products may have minimums of $1,000 or more.
Opening a 401(k) is not something you do yourself — your employer sets it up, and you enroll through your company's benefits portal or HR department. You'll choose how much to contribute from each paycheck and pick your investments from the options the plan offers.
Opening an IRA is similar to a brokerage account: you go to a bank or investment firm's website, provide your personal information and Social Security number, link a bank account, and choose your investments. You can open one at the same firm where you have a brokerage account, or at a different one. There's no penalty for having accounts at multiple firms.
For a SEP-IRA or Solo 401(k), you'll need to set up a business structure (sole proprietorship, LLC, S-corp, or C-corp) and get an Employer Identification Number (EIN) from the IRS. The investment firm where you open the account will guide you through the paperwork, which is more involved than opening an IRA but still manageable.
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. However, if you have a 401(k) at work, the tax deduction for a Traditional IRA contribution may be reduced or eliminated depending on your income. A Roth IRA has no such restriction. Your total IRA contributions (Traditional and Roth combined) cannot exceed the annual limit.
What happens to my 401(k) if I leave my job?
You have several options: leave it with your former employer's plan (if the balance is large enough), roll it into an IRA at a bank or brokerage, or roll it into your new employer's 401(k) if they allow it. A rollover preserves the tax-deferred status and avoids when ready taxes and penalties. You typically have 60 days to complete a rollover, though a direct rollover (employer to employer) has no time limit.
Can I withdraw from my IRA or 401(k) before age 59½?
You can, but you'll usually owe a 10% penalty plus income tax on the amount withdrawn. Exceptions include substantially equal periodic payments, disability, medical expenses above 7.5% of income, first-time home purchase (up to $10,000 lifetime), and education expenses. A 401(k) also allows loans against your balance, which you repay with interest.
What's the difference between a Traditional and Roth 401(k)?
A Traditional 401(k) reduces your taxable income now and taxes withdrawals in retirement. A Roth 401(k) is funded with after-tax dollars and offers tax-free withdrawals in retirement. Both have the same contribution limits and employer match rules. Not all employers offer a Roth option, so check your plan documents.
Do I need a lot of money to start investing?
No. Most brokers have no minimum deposit, and you can buy fractional shares of stocks and ETFs, meaning you can invest $50 or $100 to start. Some investment firms have minimums for certain funds or advisory services, but basic brokerage accounts are open to anyone. Starting small and investing regularly (even $50 per paycheck) builds wealth over time through compound growth.