My friend in the US (I don't live there permanently) has a Youth who has started work as a teen while at school/college ("at Starbucks" type of thing) and we were discussing the various ways such a Youth should begin Saving For Retirement. What I mean is in the government sanctioned tax-advantaged manner(s) available in that country.

I actually (A) know nothing about this (I hear the usual terms "401" etc), (B) I trust this list more than Friend :) and (C) surprisingly .. I really couldn't find a concise, appropriate, summary of this on the internet. (If I'm wrong, bad me.) (I think a lot of the explanations for US folks just "assume obvious stuff US folks would know" if you see what I mean.)


  • Youth is about 18 presently
  • Youth will/should initially save (IMO) say $50-$100 a week to retirement system (for now she makes the typical teen income, some couple hundred $ a week), obviously growing later when she is a normal employed adult
  • Youth has already established correctly a normal bank account (sensibly a local credit union, knows how to use it etc), bravo
  • Unfortunately Youth has been working for 6 months or so already and has not yet started (hence this urgent question!)
  • Youth is a Female Youth so conceivably could get married later; seems like a factor?
  • I can't imagine investing this in anything but the cheapest-fee possible S&P index fund. But. Could there be something to be said for some sort of system (is this possible?) where it's basically in a brokerage account and Youth (or Eagle-Eyed Parent, or Uncle Fattie) could keep an eye on the positions being sensible?
  • How do you mechanically do this (in the US?) Is it like a government function or something and the money goes through some gov't department? Do you basically open a brokerage account and tick a box "401" (or one of those abbreviations)? Or what?

What is it you have to "do" in Usa to "start one of the retirement systems"?

Special circumstance,

  • As with my family, they are a bit "internationalized" so there is some chance that Youth, when she is say 40 or such (ie well before retirement), will suddenly leave the USA, move to Korea or something and never return so, is that a special consideration? Is there options to, and/or must one never, "break out" of the system (perhaps taking a tax hit then?) or?

And one from me

  • In the USA, is there any thinking that you should just "ignore" the tax advantaged systems (whatever they are) and just invest raw (ie presumably after paying income tax each year) and presumably just cough up the cap gains in the Future when you retire? Or is it "too good to ignore!"?

4 Answers 4


Retirement accounts have the major advantage that changing one's investments within the account (over the coming decades) does not incur capital gains tax along the way. This is a separate, underappreciated benefit from the famous benefits of retirement accounts such as pre-tax contributions or no-tax withdrawal in retirement.

If the employer offers no plan, then IRA is the choice.

With a Roth IRA, all contributions may be withdrawn without penalty at any time. Only the gains/dividends are restricted or penalized if withdrawn. This is especially relevant if potentially moving countries and moving money.

Choosing a brokerage or mutual fund family, several choices offer no fee accounts and low-fee index funds.

Contributing at most $100/week is $5200/year which is safely under the IRA contribution limit of $6000/year.

Low-income workers/households should not neglect the Saver's Credit, which gives cash back on their income taxes as a reward for retirement savings.


For investing for retirement, there are four main types of accounts:

  • Standard taxable account: There are no tax breaks with this one, but no restrictions, either. If you will need the money before retirement age, or you want to invest above the limits of the tax-advantaged accounts, this is your primary option. When you set up a standard investment account with a brokerage or a mutual fund, this is the default.
  • Employer plan/401(k): This is an employer plan, so if your employer offers it, you can use it. Generally, anything you contribute is deducted from your income taxes, and you don't pay any tax on any growth until you take the money out at retirement. Usually, this account has only limited investment options. Sometimes your employer will match some of the money you put in. It is most often called a 401(k), but some employers will offer a 403(b) or a SIMPLE IRA, which are both very similar to a 401(k). Finally, some employers will offer a Roth 401(k), which is a 401(k) that is taxed like a Roth IRA (described below). To participate in an employer plan, all you need to do is tell your employer how much you want to contribute, and they will automatically take your contribution out of each paycheck for you.
  • Traditional IRA: This you manage yourself; it does not go through your employer. Anything you contribute is deducted from your income taxes, and gains are not taxed until retirement age. You can invest in almost anything inside an IRA account. To set this up, you simply designate it as such when you set up your investment account. There are limits to how much you can contribute/deduct each year.
  • Roth IRA: With this IRA, you don't deduct your contributions from your income taxes; you fund this with after-tax money. However, once funded, it grows completely tax free, and you don't pay any tax when you take it out at retirement age. In addition, whatever you put in, you can take out anytime if you need to.

If you have an employer plan available to you where your employer is matching some of your contributions, that is the best place to start. Your investment grows immediately as you put money in, due to the match. It is essentially extra money that your employer is giving you. Even a seemingly small match is worth it.

For a young person who wants to save for retirement and does not have an employer-matched plan available, a Roth IRA is what I would recommend. Because they currently have a low income/tax rate, they would not benefit much from the tax deduction of the 401(k) or the Traditional IRA; it costs them less to participate in the Roth than it does a high income individual. And once you pay the tax, you are done; the money grows in the account tax-free and no taxes are due when you take it out down the road.

  • Ben I feel your straightforward reco. in the final para, is sort of "the answer here", thanks! guys since All Answers Were Good, I did tick the first-answered answer which seems polite in these cases. I'm sure all the wealth of info on this page will be helpful for a lot of googlers. Cheers
    – Fattie
    Jun 3, 2021 at 15:13

Common tax-deferred vehicles include:

  • 401k: an employee benefit offered by for-profit organizations, sometimes with a match
  • 403b: an employee benefit offered by not-for-profit organizations
  • SEP and SIMPLE IRAs: an employee benefit offered by for-profit organizations (often smaller organizations with a single owner)
  • Traditional IRA: an individual's self-directed account held in trust by a financial institution.
  • Roth IRA: an individual's self-directed account held in trust by a financial institution
  • Buy and hold securities

The employee benefit plans are offered by the employer. The youth should ask the HR department if they are eligible. In the event they separate from the employer, they can stay in the plan as long as the employer lets them; and if not, or at their discretion, can create a "rollover IRA" (similar to a Traditional IRA) at a financial institution.

Traditional IRA and Roth IRA are set up at a financial institution by the youth. Traditional IRA generally reduces income tax in the year of contribution, and is taxed as income when distributed. After the age of 70.5, there is a required minimum distribution based on life expectancy.

Once the total income of the year is assessed, it is possible the contributions to a traditional IRA do not reduce tax in the year of contribution (it phases out for high income earners; and the limits are tighter if the taxpayer is eligible for a 401k or 403b from their employer). The contributions shouldn't be taxed when ultimately withdrawn, but this confounds bookkeeping until retirement age.

Roth IRA distributions are not taxed when taken in retirement age, or under certain pre-retirement scenarios (illness, first home purchase).

Buying and holding securities has certain advantages based on current tax law, though since the federal income tax was established in 1913 the rates and rules have both increased and decreased every few years. For several periods, capital gains have been treated as ordinary income. Advantages in the current rules compared to IRAs include exact control of the year of incurring the gains; step up in basis in estate tax; and capturing losses that currently can be used to offset some ordinary income. A disadvantage is in the event of a corporate merger, the owner may lose control of the year of taxation.

The rough heuristic for an 18 year old should be:

  • contribute to a 401k with a match to capture the match percentage
  • contribute to Roth to the limit
  • contribute to 401k or traditional IRA to the limit
  • buy and hold

Whether Roth or IRA are prioritized in the second step can change closer to retirement age and is a conditional function on the marginal income tax rate in the current year, the best guess of the marginal income tax rate in retirement, and at the point of forced RMD at age 70.5.

Letting a parent monitor an account. The youth can execute a power of attorney letting someone else monitor and control investments on their behalf. Well established financial institutions should have a form for this, for example.

South Korea and Social Security You didn't ask about Social Security directly, but did ask about automatic government plan participation. All regular US employees participate in Social Security with contributions automatically deducted by their employers. South Korea has a similar system, and there happens to be a reciprocal treaty between the nations where credits in one system can be used in the other for full eligibility, in the event the individual does not have enough in the place where they retire.

  • great point about S/S. that is a big cost/consideration for someone who "moves away overseas". (I mentioned Korea as a random example btw!)
    – Fattie
    May 28, 2021 at 18:35
  • 1
    guys since All Answers Were Good, I did tick the first-answered answer which seems polite in these cases. I'm sure all the wealth of info on this page will be helpful for a lot of googlers.
    – Fattie
    Jun 3, 2021 at 15:12

How do you mechanically do this (in the US?) Is it like a government function or something and the money goes through some gov't department?

That's the mandatory Social Security taxes, which you are not referring to.

Do you basically open a brokerage account and tick a box "401" (or one of those abbreviations)?

That's exactly how you do it, by opening a Roth or traditional IRA at a brokerage (Vanguard, Fidelity, Schwab, etc, etc).

Note, though, that there are two methods (the employer-sponsored 401(k), and the employee-driven IRA), and within those, there are two types (traditional pre-tax contributions, and Roth after-tax contributions).

  • 401(k) programs usually have an "employer contribution" component which is typically 2% of income. Part-time employees might not be offered that, though.
  • The IRS will eventually get it's slice of her flesh; it's up to her to decide whether to pay income tax now or later.
  • For someone earning not too much money, pay taxes now because the tax rate is so darned low; possibly 0%.

Thus, I agree with Orange County: she should invest some savings in a Roth IRA (or possibly 401k if her employer offers it, and contributes extra); the money will not only grow tax-free, but future withdrawals will be tax free.

there is some chance that Youth ... will suddenly leave the USA, move to Korea or something and never return

EDIT: paragraph removed because it's not correct. https://www.schwab.com/ira/roth-ira/withdrawal-rules

  • @Fattie "Can Jack now deduct $950,000 Scott-free, no tax on the 950,000 ?" Five after the first contributions. Of course, the likelihood of your investment growing 20x is exceedingly unlikely.
    – RonJohn
    May 28, 2021 at 18:41
  • @Fattie I was wrong. See the edit and added link.
    – RonJohn
    May 28, 2021 at 18:44
  • thanks, nowhere does it explain what tax you pay, if, you do withdraw growth with penalities, huh. i wonder if it's capital gains rate or ??
    – Fattie
    May 28, 2021 at 19:04
  • @Fattie it's treated as normal income.
    – RonJohn
    May 28, 2021 at 19:06
  • "Do you basically open a brokerage account and tick a box "401" (or one of those abbreviations)? That's exactly how you do it." Er, not quite. 401{k) accounts are invested through the employer's 401(k) plan website, not via opening a brokerage account and checking the 401(k) box in the process. Money going into a 401(k) account is put in by the employer as a deduction from the wages paid. May 28, 2021 at 19:24

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