Unit 5 · Lesson 7 Retirement accounts

Free money first. Then let time do the rest.

The story so far You've got VOO at Oakline, an emergency fund in savings, and a plan for when the market drops. Then your first full-time offer arrives: $50,000 a year at Brightline Foods. Page 6 of the benefits packet says: "401(k): we match 100% of your contributions, up to 4% of pay. The match vests after 2 years." This lesson turns that one sentence into real money.

What

A 401(k) is a retirement account through your job. An IRA is one you open yourself. Both come in traditional and Roth versions.

Why

Tax breaks, plus free money from your employer's match, can leave you far more at retirement than the same savings in a regular account.

How

Put in at least enough to get the full match, add a Roth IRA, invest in low-cost index funds, and leave it alone until retirement.

Who

HR benefits specialists explain the plan to new hires. Recordkeepers like Fidelity and Vanguard run the accounts, and financial planners help people choose.

What you're looking at: a sketch, not data. With a 100% match, every dollar you put in brings a dollar from your employer, so the jar fills twice as fast.

01 See it

Retirement accounts are investing with a tax break.

Inside, they hold the same index funds you already know. The difference is the deal around them. Every number below is a real 2026 rule from the IRS.

The 401(k): saving straight from your paycheck

A 401(k) is a retirement account offered through your job, named after a section of the tax code. You pick a percent of pay, and that slice of every paycheck goes in automatically and gets invested. What you put in is your contribution. In 2026 you can contribute up to $24,500 a year. In exchange for the tax break, the money is meant to stay in until about age 59½.

In this example

401(k): Brightline pays you every two weeks, 26 times a year: $50,00026 = $1,923.08 a paycheck.
Contribution: Choose 4% and $76.92 of each paycheck goes in, $2,000 a year.

The match: a 100% return on day one

Many employers add money when you contribute. That's the employer match. It only comes if you put money in yourself, so skipping it is like turning down part of your pay. The match usually has to vest before it's fully yours: leave the job too soon and you can lose it. Your own contributions are always 100% yours. Slide your salary and contribution, and try three common match formulas.

In this example

Employer match: Brightline matches 100% up to 4% of pay. You put in $2,000, so Brightline adds $2,000. Put in 2% instead and you get only $1,000, leaving $1,000 a year on the table.
Vest: Brightline's match vests after 2 years. Leave after 1 year and you keep your $2,000 but lose Brightline's $2,000. Stay 2 years and it's all yours.

Salary $50,000

You put in 2% of pay

Match formula

What you're looking at: a calculator, not market data. The bar shows one year of contributions: yours, your employer's, and any match you'd get by putting in more. The three formulas are common in real plans. In Vanguard's How America Saves 2026 report, covering 2025, the average employer promised a match worth 4.7% of pay, and the typical one was 4%.

Traditional or Roth: pay the tax now or later

Every 401(k) and IRA comes in two tax flavors. A traditional account skips the income tax now and taxes the money when you take it out. A Roth account is the reverse: you pay tax now, and everything, growth included, comes out tax-free in retirement. Which one wins depends on your top tax rate now compared with later. Pick both rates.

In this example

Top tax rate: On a $50,000 salary in 2026, after the $16,100 standard deduction, your last dollars are taxed at 12% federal. Raises could push you to 22% later.
Traditional: $1,000 of pay goes in whole. After 45 years at 7% it's $21,002, and at a 22% rate you keep $16,382.
Roth: You pay 12% first, so $880 goes in. It grows to $18,482, all yours, tax-free.

Your top tax rate now

Your rate in retirement

What you're looking at: a calculator, not market data. Both columns start with the same $1,000 of pay and grow for 45 years at 7% a year after inflation, close to the S&P 500's real average of 6.8% a year from 1928 to 2025. The blocks are drawn to scale.

IRAs: retirement accounts you open yourself

An IRA, short for individual retirement account, is one you open at a brokerage like Oakline, no employer needed. In 2026 you can put in up to $7,500 a year in total across your IRAs, but no more than you earned from work that year. A Roth IRA has two extra perks: the money you put in, though not its growth, can come out any time with no tax or penalty, and a single person earning under $153,000 in 2026 can put in the full amount. That means a summer job is enough to start one in college.

In this example

IRA: Your summer job paid $4,000. You can put up to $4,000 in an IRA this year, since that's less than the $7,500 limit.
Roth IRA: You open a Roth IRA at Oakline and buy VOO inside it. If you put in $4,000 and it grows to $4,300, you can take back your $4,000 any time, but the $300 of growth stays until retirement.

Start early: time does the heavy lifting

Money put in at 22 has 45 years to grow and compound before 67. Money put in at 40 has 27. That's why the cheapest dollars you'll ever save for retirement are the early ones. Slide your starting age.

In this example

Starting at 22: $200 a month, $2,400 a year, from 22 to 67 is $108,000 put in. At 7% a year it grows to about $685,798.
Starting at 32: The same $200 a month from 32 is $84,000 put in, and grows to about $331,769, less than half.

Start at age 22

What you're looking at: a calculator, not a forecast. $200 a month goes in until age 67, growing 7% a year after inflation, so the amounts are in today's dollars. The gray area is the money you put in; the green area is growth. Real returns jump around year to year, as you saw in the last lesson.

Don't cash out early

Take money out of a 401(k) or traditional IRA before age 59½ and you usually owe a 10% early withdrawal penalty plus income tax on it. When you leave a job, you don't have to cash out. A rollover moves the money into an IRA or your new job's plan, with no tax at all. Ask for a direct rollover, sent straight from one account to the other, so nothing is held back for taxes.

In this example

Early withdrawal penalty: At 25 you cash out a $9,000 401(k) at a 12% tax rate. The penalty is $900 and the tax is $1,080, so you keep $7,020.
Rollover: Roll the $9,000 into an IRA instead, and at 7% a year it's about $154,298 at 67.

The order to fill them

Most planners suggest the same three steps, once your emergency fund is in place and high-interest debt is paid off. Inside each account, pick a low-cost index fund or a target-date fund.

In this example

Target-date fund: Brightline's plan offers a 2070 fund for people retiring around 2070. It's mostly stocks now and adds more bonds each decade. In Vanguard's report, 84% of people whose plan offered target-date funds used them.

1
401(k) up to the full match
Brightline: 4% of pay, $2,000 a year, to get the $2,000 match.
2
Roth IRA
Up to $7,500 a year in 2026, at Oakline, in an index fund.
3
More in the 401(k)
Raise your percent each year, up to the $24,500 limit.

02 Hear it

Two minutes. Just listen.

Tap any line to jump to it.

03 Play it

Benefits day: four choices, forty years.

You're 22 and starting at Brightline Foods on a $50,000 salary. Make four real choices in a practice benefits app, from your first week to your next job. After each one, see what every option would be worth at 67. Your score counts the best calls.

Mission 1 of 4

Best calls0 of 0

Brightline FoodsBenefits

At 67, in today's dollars

What you're looking at: a practice benefits app for a made-up company. The rules, limits and tax rates are real for 2026. Amounts at 67 assume 7% a year after inflation for stock funds, minus each fund's fee, and 1% for the stable value fund, so they're in today's dollars. Real returns will vary.

04 Break it down

The logic, step by step.

Five calculations cover every retirement-account decision in this lesson.

Step 1: How much the match adds

Multiply the match rate by the percent of pay it applies to, which is your percent up to the cap, and by your salary.

Match = match rate × your percent, up to the cap × salary

In this example

You put in 4%: 100% × 4% × $50,000 = $2,000.
You put in 2%: 100% × 2% × $50,000 = $1,000, half the match.
50% up to 6%: At 6%: 50% × 6% × $50,000 = $1,500.

Step 2: The return on the match

Divide what your employer adds by what you put in.

Instant return = matchyour contribution

In this example

100% match: $2,000$2,000 = 100%, before your fund earns a cent.
50% match: $1,500$3,000 = 50%. The S&P 500's best year since 1928 was +52.6%.

Step 3: Traditional vs. Roth

Both start with the same pay and grow by the same factor. The only difference is when the tax comes out: at the end for traditional, at the start for Roth.

Traditional = pay × growth × (1 − later rate)

Roth = pay × (1 − rate now) × growth

In this example

Growth: 45 years at 7%: 1.07⁴⁵ ≈ 21.00.
12% now, 22% later: Traditional: $1,000 × 21.00 × 0.78 = $16,382. Roth: $1,000 × 0.88 × 21.00 = $18,482. Roth wins.
12% now, 12% later: Both are $1,000 × 0.88 × 21.00 = $18,482. Multiplying in a different order gives the same answer, so equal rates mean a tie.

Step 4: What steady saving grows to

For the same amount every year, use the future value of a series of payments, where r is the yearly return and n is the number of years.

Future value = yearly amount × (1 + r)ⁿ − 1r

In this example

From 22, 45 years: $2,400 × 1.07⁴⁵ − 10.07 = $2,400 × 20.000.07 ≈ $685,798.
From 32, 35 years: $2,400 × 1.07³⁵ − 10.07 = $2,400 × 9.680.07 ≈ $331,769.

Step 5: What cashing out really costs

Before 59½, subtract the 10% penalty and your tax rate from what you take out.

You keep = amount × (1 − 0.10 − tax rate)

In this example

$9,000 at 12%: $9,000 × (1 − 0.10 − 0.12) = $9,000 × 0.78 = $7,020. Left invested, it would be $9,000 × 1.07⁴² ≈ $154,298 at 67.

Worked example: your first-job plan

Get the match. Set your 401(k) to 4%: $2,000 a year from you, $2,000 from Brightline, invested in the 2070 target-date fund or an S&P 500 index fund.
Check the cost. 4% is $76.92 a paycheck before tax. In a traditional 401(k) you skip 12% tax on it, so your take-home pay drops only about $76.92 × 0.88 ≈ $67.69.
Add a Roth IRA. At a 12% rate now, Roth makes sense. Start with $100 a month at Oakline, $1,200 a year.
Stay to vest. Brightline's match vests after 2 years. If you leave after 3, all of it rolls over with you.
The result. $4,000 a year for 45 years at 7%: $4,000 × 20.000.07 ≈ $1,142,997 in today's dollars, plus about $342,899 from the Roth IRA.

05 Nature link

Squirrels plant the forest they'll never see.

Every fall, a gray squirrel buries thousands of acorns, one at a time, in small holes all over its range, and digs most of them up during the winter. The ones it leaves alone sprout. Squirrels are one of the main ways oak forests spread.

What you're looking at: an illustration, not data. A squirrel buries an acorn. Nearby, an acorn it never dug up has sprouted, and a grown oak stands in the distance.

Why this sticks. Every contribution is an acorn. Bury a few with every paycheck, then leave them alone, because the ones you dig up early, by cashing out, never become anything. The ones you leave in the ground for 40 years grow into something far bigger than what you buried.

06 Notes

The page you'd copy down.

401(k): retirement account through your job, straight from each paycheck. 2026 limit: $24,500.
Employer match: money your employer adds when you contribute. Always put in enough to get all of it. Match = match rate × your percent, up to the cap × salary.
Vest: when the match becomes fully yours. Your own contributions are always yours.
Traditional: tax break now, taxed later. Roth: taxed now, tax-free later. Low rate now and higher later means Roth wins; equal rates tie.
IRA: one you open yourself. 2026 limit: $7,500, no more than you earned from work. Roth IRA contributions can come out any time without tax or penalty.
Start early: $200 a month from 22 is about $685,798 at 67; from 32, about $331,769.
Early withdrawal penalty: 10% plus income tax before 59½. When you change jobs, do a direct rollover instead.
Order: 401(k) to the full match, then Roth IRA, then more 401(k), in index or target-date funds.

Fill in the blanks

1. Money your employer adds when you contribute is the employer .

2. With a account, you pay tax now and take the money out tax-free in retirement.

3. In 2026, you can put up to $ a year into IRAs.

4. Cashing out a 401(k) before age 59½ usually costs a % penalty plus income tax.

07 Together

Grab a friend or a study group.

Read a real benefits packet

Ask a parent or friend with a job what their 401(k) match formula is. Work out the least they need to put in to get all of it, and whether they do.

Roth or traditional debate

Split into two sides. Each picks a person, like a student, a new nurse or a surgeon at 45, and argues which account fits them, using top tax rates now and later.

The start-age race

Everyone picks an age to start saving $200 a month. Use the slider above to find each person's total at 67, then work out what the latest starter would need each month to catch up.

08 On your own

Just you and your money.

These stay on this device. Nobody else sees them.

When do you expect your first job with a 401(k)? What percent will you set it to on day one?

Could you start a Roth IRA now, with summer or part-time work? How much a month feels doable?

What would tempt you to cash out early, and what would you tell yourself instead?

09 Check

Exam-style questions.

Written the way a college exam would ask them. Each right answer on the first try is worth 10 xp.

On the job: you're the HR benefits specialist

Jordan, 23, just started at your company on a $45,000 salary. She tells you she's skipping the 401(k) to save for a car, because "retirement is 40 years away." Your plan matches 100% up to 4% of pay, the match vests after 2 years, and the plan offers a Roth 401(k) and a 2070 target-date fund.

Your task: work out what skipping costs her each year and by 67, assuming 7% a year, and what she'd give up per paycheck to get the match. Then write what you'd suggest.

See a model answer

The numbers: 4% of $45,000 is $1,800 a year from her, and the company adds $1,800, for $3,600 a year. Skipping turns down $1,800 of pay every year. Over 44 years at 7%, $3,600 a year grows to $3,600 × 1.07⁴⁴ − 10.07 ≈ $958,035.

The cost per paycheck: $1,80026 ≈ $69.23 every two weeks.

What to suggest: put in 4% so she gets every dollar of the match. At her 12% rate, the Roth 401(k) is a good fit, though the match itself goes in as traditional money. Pick the 2070 target-date fund, keep saving for the car with the rest of her pay, and if she can, stay 2 years so the match vests.

10 Where it leads

From your first paycheck to the day you stop working.

What you're looking at: a map of where this lesson fits in the course. Read it left to right: the lessons that come before, this lesson in the middle, and the later lessons that build on it.

Before · Unit 5When the market drops
Before · Unit 5Index funds and the S&P 500
You are here401(k) and Roth IRA
Later · Unit 2Read your first pay stub
Later · Unit 2Where your taxes go
Later · Unit 10A dollar today vs. later

Back to the course map →