EDIT FROM MARCH 2021: When I wrote this post, I had not yet figured out a way to get money out of a pre-tax (traditional) 401(k) without paying taxes on it. Now that I’ve figured it out, I no longer believe the Roth 401(k) is the best option, but I’ve left this article intact as it was originally published so you can see my original thought process. Here’s the more recent follow-up about why I switched my 401(k) from Roth to Traditional.

Ah, the old 401(k) decisions. There you are – freshly employed (by an employer that offers a 401(k), no less!) and eager, ready to begin your journey with a new company. And then comes the paperwork.

The stack of decisions is tall and overwhelming when onboarding, and I remember the 401(k) election process well (I texted my roommate at the time, Rob, and said, “Uh, so what do I do?” We’ve come a long way, people).

When you’re selecting your choices for your 401(k), there are usually a few options you’ll be presented with. Thanks to our human fallibility, the likelihood that you’ll go back later and correct mistakes made early on in your 401(k) election process is slim – though, of course, you absolutely can if you’re reading this several years into your employment.

I’ll remind you, at this point, that I’m not a ~ licensed financial professional ~ — I am merely a young woman with a fat 401(k) and some hot takes on how you can make yours fat, too.

Baseline: What’s a 401(k), in English, please?

A 401(k) is essentially just a retirement account that you can only get through your employer. You can think about your 401(k) as the magic pumpkin that’s going to take you to the retirement ball, and your employer is the fairy godmother. No employer, no pumpkin.

Why should you care? Oh, my friends – the answer is very simple. When you invest money in a 401(k), you don’t pay taxes every year on the growth. In a non-retirement investment account, you have to fork over taxes every tax season on your investment’s growth. That really eats into your returns over time (over 30 years, to the tune of hundreds of thousands of dollars, in some cases).

Because the 401(k) is our magic tax school bus (pumpkin?), the IRS puts a limit on how much you can contribute every year – mostly to avoid situations in which mega-rich people would shovel hundreds of thousands of dollars into a tax-free account. The annual limit is $19,500.

What’s the catch? Good question. You can’t access this money (without penalty) until you’re 59.5 years old. Honestly, though, this isn’t much of a catch for Future You. Future You will use this money to vacation in the Maldives for a month at a time without Becky the Project Manager nosing into your inbox.

(Can you tell I’m already pumped to retire?)

Your 401(k) may be offered through your employer, but technically, they’re outsourcing the job to a financial institution. Your 401(k) might be with Fidelity, Empower, or any other number of brokerage firms.

Step #1: The obvious one – yes, you should opt in. No, there’s no excuse not to.

…unless your company doesn’t offer a match and the account has high fees, which I’ve encountered before in client sessions. 99% of the time, though, a company will offer some semblance of a match, which makes this a no-brainer. And remember that “human fallibility” thing we just touched on? I can almost guarantee you that if you don’t set it up now, you’ll probably forget until you’re 36 and by then your retirement hopes will be dashed and you’ll be doomed to working for The Man forever. We don’t want that. Opt in.

The 401(k) is a gift from the tax-deferred gods and I promise you, you want that tax-free growth bucket working in your favor.

Step #2: Choose your account type, if you’re given an option (choose Roth).

For most of you reading this, the Roth 401(k) will turn your “magic pumpkin” situation into a “matte black G-Wagon” situation.

PAUSE: If the word “Roth” is making your head hurt, I suggest opening this article in a new tab and heading there next. It’ll break down “Traditional” vs. “Roth” for you in a way that won’t tempt you to fall asleep.

Here’s why Roth is the next-level option: It allows you to pay the taxes on the money upfront, in your current tax bracket, then withdraw it (and all that sweet, sweet compound interest) in 30 years from now, tax-free.

I hope a choir of angels and litany of party horns are going off in your brain right now, because that’s the only appropriate reaction to this revelation.

The government hardly lets us do ANYTHING tax-free – by my account, breathing is the only thing I do on a daily basis that isn’t taxed.

Of course, you have to pay your income tax on the contribution upfront, but after it’s in, it’s all yours, baby. And unlike the Roth IRA (which has an income limit of around $139,000), there’s no income limit for the Roth 401(k) – which means no matter how much you make, you can go Roth.

The deciding factor here comes down to how much money you make and your current tax bracket. If you’re a high roller pulling in $600,000 per year (hello, may I ask what you’re doing on my blog?), you’re in a 37% tax bracket in the year 2020. Probably not the bracket you want to be paying taxes in. In that case, you’re going to be better off rocking a Traditional and taking the tax deduction. But if you’re making, for argument’s sake, less than $200,000, I think Roth is still the way to go.

It’s hard to say how federal income tax brackets will look in 30 years, but by choosing Roth, you’re basically making a bet that your tax bracket will be higher in retirement than it is now.

There are some other reasons and case studies we could dig into here, but for the sake of expediting your 401(k) setup, let’s keep going.

Step #3: Decide what to invest in (my recommendation would be to choose a target date fund).

This is a step that feels like it should be obvious, but in my experience, it isn’t always.

Once your money is in the 401(k), you have to choose what it gets invested in. The 401(k) is just the vehicle. It’s the G-Wagon, remember? The investments themselves are the engine – it powers the magic.

You’ll probably have a slew of different mutual funds to choose from, but my personal recommendation would be to choose a Target Date Fund.

A target date fund (like the Vanguard 2060) is a mutual fund that automatically rebalances itself (meaning, the stocks and bonds mix and the allocations therein) as you near closer and closer to your retirement age (in the Vanguard 2060, that would be the year 2060).

In the beginning, it’ll be super aggressive, and as you get closer, it’ll make changes automatically to mitigate your risk – to protect you from big market downswings and volatility as you’re closer and closer to actually withdrawing some of the money.

I know people have hot takes on these funds (the main complaint being that you don’t get to pick what’s going on inside it), but I ask you this: Do you understand more about mutual funds than the fund managers at Vanguard? Do you want to spend your time every year analyzing your 401(k), reallocating funds, and rebalancing it manually?

The answer to those two questions might be yes, depending on your background, but for the vast majority of the people I interact with, they’re far better off choosing a target date fund and letting the automation do its thing.

The worst thing you could do is react to market news (e.g., a crash of epic proportions like we saw in March 2020) and adjust things in your 401(k). If you’re in your twenties and thirties, your retirement timeline is still so far away that you shouldn’t be making any abrupt changes based on the markets. You’ve got a long time to ride this wave, my friend.

Unconvinced? Consider this: If you had invested $10,000 in the S&P 500 in 1980 (40 years ago), you’d have more than $800,000 today. You know how much terrible shit has happened since 1980? Multiple stock market crashes, for one thing; terrorist attacks, wars, and a pandemic, for another. In other words, when you have time on your side, you’re going to be fine.

So don’t stress about how to invest your 401(k) yourself. Pick a target date fund and be done with it. The expense ratio of the Target Retirement 2060 fund (the Vanguard fund mentioned above) is only 0.15%, which is fantastic. It’s likely that the brokerage firm also assesses account fees separate and apart from the fees assessed on your mutual fund of choice, so that’s also worth noting as well (in other words, you’ll pay a fee on the 401(k) and on the funds within it; to extend our analogy, you’re paying a fee on your G-Wagon and its engine – how did we get here?).

Step #4: Decide on your contribution (contribute at least the match, and shoot for 10% or higher).

If your employer offers a 4% match and you don’t contribute 4%, I will personally hunt you down and light your money on fire – because that’s what you’re doing!

Contribute at least up to the match (Linda from HR will be able to tell you what that is), and shoot for 10%. I would suggest aiming a little higher than you think you can go at first, then tempering it down later if you need to. Unfortunately, the “I’ll start small and work my way up” approach is less likely to pan out for you as expected, because… human fallibility. We’re forgetful. There’s no incentive to contribute MORE once you get used to your fat paychecks. Suck it up and start big.

My friends, that’s really all there is to it.

Now go do it. Right now. I mean it!