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INVESTING How to Start Your 401k: A Step-by-Step Guide for Fir... 2026-02-27 · 5 min read · 401k · retirement · investing

How to Start Your 401k: A Step-by-Step Guide for First-Time Investors

investing 2026-02-27 · 5 min read 401k retirement investing workplace benefits

Starting your 401(k) is the single most impactful financial move most employed people can make. It reduces your taxable income today, grows tax-deferred for decades, and often includes free money from your employer through matching contributions. Yet nearly 30% of eligible employees don't participate — leaving thousands of dollars on the table every year.

Here's how to set yours up correctly from scratch.

Step 1: Find Out What Your Employer Offers

Every employer plan is different. Before making decisions, get the details:

This information is in your employee benefits packet or available from HR.

Step 2: Enroll in the Plan

Enrollment is either automatic (many employers now auto-enroll at a low contribution rate, like 3%) or requires you to actively opt in.

To enroll:

  1. Log into your employer's benefits portal (HR or your employee portal usually has a link)
  2. Locate the 401(k) or retirement plan section
  3. Set your contribution rate
  4. Choose your investments
  5. Designate a beneficiary (who receives the account if you die — don't skip this)

If your employer auto-enrolled you, don't assume the default contribution rate and investment choices are optimal. Check and update both.

Step 3: Set Your Contribution Rate

Priority 1: Contribute at least enough to get the full employer match. If your employer matches 100% of the first 4% you contribute, your effective return on that 4% is 100% before any investment growth. No other investment reliably returns 100% immediately. This is genuinely free money — not contributing enough to capture the full match is the most common and costly 401(k) mistake.

Priority 2: Work toward 15% of gross income total (including employer match). This is the commonly recommended target for retiring comfortably at a traditional retirement age. If employer matches 4%, you'd need to contribute an additional 11%.

Priority 3: Know the 2026 IRS limit. Employee contribution limit for 2026 is $23,500 ($31,000 if you're 50 or older, due to catch-up contributions). You can contribute up to this amount regardless of your income level.

If 15% isn't feasible now, start where you can. 4% gets the match. Then increase by 1% per year — most people don't notice the income reduction once they've adjusted, and the long-term difference is enormous.

Step 4: Choose Your Investments

This is where many new investors freeze up unnecessarily. The good news: the right choice is usually simple.

Look for these funds, in order of preference:

Target-date fund (easiest option): Choose the fund closest to your expected retirement year (e.g., "Target Date 2055 Fund" if you'll retire around 2055). These funds hold a mix of stocks and bonds that automatically adjusts (becomes more conservative) as you approach retirement. This is a perfectly acceptable "set it and forget it" choice. The main downside is expense ratios — check that yours is below 0.20%.

Index funds (best for cost-conscious investors): If target-date funds in your plan have high expense ratios, build a simple portfolio with index funds:

Look at expense ratios. A fund with 0.75% expense ratio costs you 10× more annually than one with 0.07%. Over a 30-year career, that difference compounded can represent years of additional retirement savings.

What to avoid:

Step 5: Set Up Automatic Increases

Many plan providers offer automatic escalation — your contribution rate increases automatically by 1% per year. Enable this. It's the most painless way to reach the recommended 15% contribution rate over time. Your income increases over your career, and this feature channels a portion of each raise into retirement savings before you adjust your lifestyle to the new income level.

Understanding the Tax Benefit

Traditional 401(k): Contributions reduce your taxable income today. If you're in the 22% bracket and contribute $10,000, you save $2,200 in federal taxes this year. The money grows tax-deferred until withdrawal at retirement, when you pay ordinary income taxes.

Roth 401(k): If your employer offers this option, contributions are made with after-tax dollars (no immediate tax break), but all growth and withdrawals in retirement are completely tax-free.

Which is better? If you're in a lower tax bracket now than you expect in retirement (early career, high income growth expected), Roth is often better. If you're in a high tax bracket now and expect lower income in retirement, traditional is usually better. Many financial planners recommend splitting contributions between both if your plan allows — tax diversification in retirement gives you more flexibility.

What Happens to Your 401(k) When You Leave a Job?

When you leave an employer, you have four options:

  1. Leave it with the old employer's plan (only reasonable if the plan has excellent investment options)
  2. Roll it to your new employer's plan (good if new plan is strong)
  3. Roll it to an IRA (often the best option — more investment choices, typically lower fees)
  4. Cash it out (worst option — subject to income taxes AND 10% early withdrawal penalty before age 59½; can lose 30-40% of the balance)

Rolling over to an IRA is usually best: open a rollover IRA at Fidelity or Schwab, request a direct rollover from your old plan, and the money moves without taxes or penalties.

How Much Will Your 401(k) Actually Grow?

The power of a 401(k) is time and compound growth. A few scenarios at 7% average annual returns:

Start 10 years earlier (40 years instead of 30) at $500/month: $1,198,000 — more than double.

Every year you delay starting is a year of compounding you don't get back. Open the account today.