Two of the most common retirement accounts available are the 401K and the IRA. We will discuss each of these further later, but for now we will discuss the benefits to having a retirement account.

Hopefully we will all retire someday, assuming you are working right now. We dream of retiring at a young age lounging on the beach of a tropical island. How many people actually achieve this? Very few because of one main problem: they don't have enough in retirement income to cover such costs.

Many employers offer pension plans to their employees. A pension is great. You get a certain percentage of what you're making now in retirement, depending on how many years you put in with them. Unfortunately, it is rarely enough to live comfortably in retirement without having to pinch pennies.

And we won't even go into Social Security. People can barely live on that now let alone in the future.

If you just want to get by in retirement, go with a pension alone. If you want to live better in retirement or if you aren't able to get a pension, you seriously need to think about setting up a retirement account.

Retirement accounts allow you to contribute a percentage of your annual income to a tax-advantage account. With most you get some sort of tax advantage, and with some you can get an employer match.

Even without either of these benefits, you get the benefit of forcing yourself to set aside money each paycheck and invest it for retirement. For that reason alone, retirement accounts are worth setting up.

One of the most common retirement accounts is the 401K, or the 403B for government employees.  The 401K is a defined contribution plan.  You are able to invest a certain amount of your money each year directly from your check.  That money is then invested into investments chosen by the provider. 

The money you contribute is not taxed until you withdraw it after retirement.  If you withdraw the money early, you will have penalty fees.  If you change jobs, you should roll over your IRA and not cash out your 401K or 403B or else you will lose a lot in penalties.

You can also get an employer match up to a certain percentage.  Usually, if you invest the maximum contribution, they will give you a 100% match.  This is not the same for every employer but varies.

Both the tax advantage and the employer match are huge benefits to this type of retirement account.  If your employer offers a 401K or 403B, take advantage of it.

IRA stands for Individual Retirement Account and is the second type of the retirement accounts.  There are two types of IRAs, the Traditional IRA and the Roth IRA.

The Traditional IRA is very similar to the 401K.  If you have a 401K and an IRA, your money may or may not be taxed that year.  That depends on what bank or brokerage firm you set up your IRA with.

You are able to contribute up to $5,000 per year to a Traditional IRA.  This number will probably change in the future to adjust for inflation.  This is assuming you make within a certain amount of money, not too much, which also changes every so often to adjust for inflation.

With a Roth IRA, you don't get tax free money now.  You pay taxes on it when you receive it, but you don't have to pay any taxes on it when you retire, even on gains.  With a Rraditional IRA, you have to pay taxes on the income when you withdraw it after retirement.

When deciding between a Traditional and a Roth IRA, you have to weigh your options.  Think about the benefits of tax-free today or in the future.  If you are in a very low tax bracket now, a Roth IRA would probably be best.  If you are in a very high bracket now and believe it will be much lower in the future, you might choose traditional.  Still, later on you will be paying taxes on the earnings.

Another great benefit of an IRA is that you get to choose from a larger variety of investments whereas with a 401K you are limited to often poor funds.  Take advantage of both if you can, but if you have to choose, first go with 401K if you get an employer match, otherwise choose an IRA.