Understanding Retirement Savings: A Guide to 401(k)s and Roth IRAs for Young Adults

For many young people, that first paycheck represents more than independence—it’s the first chance to build long-term financial security. While retirement may seem far away, the decisions made early have an outsized impact thanks to the power of compound growth. Understanding the differences between 401(k)s, Roth 401(k)s, and Roth IRAs helps young workers maximize their savings opportunities from the very beginning.

The Power of Starting Early

The earlier you start saving, the more you benefit from compounding—where not just your contributions, but also the growth on those contributions, begin to generate returns. For example, contributing $100 a month from age 20 can grow to over $250,000 by age 65 (assuming a 7% return), while starting the same contributions at age 30 results in less than half that amount. Time—not just money—is the most powerful driver of retirement success.

What is a 401(k)?

A 401(k) is an employer-sponsored retirement account where contributions are typically made with pre-tax dollars. This lowers your taxable income today and allows investments to grow tax-deferred until withdrawal. Key features include:

• Tax benefits – Contributions reduce taxable income in the year they are made.
• Employer match – Many companies match employee contributions, often up to 3–6% of salary, which is essentially free money.
• Contribution limits – In 2025, employees can contribute up to $23,500 annually ($30,500 if age 50+).
• Withdrawal rules – Distributions before 59½ usually incur taxes and penalties, reinforcing that this is a long-term account.

What is a Roth 401(k)?

Many employers now offer a Roth 401(k) option in addition to the traditional plan. Contributions go in after-tax, but withdrawals in retirement—including both contributions and investment growth—are completely tax-free.

Benefits of a Roth 401(k) for Young Adults:

• Locks in today’s lower tax rate – Most students and early-career professionals are in the lowest tax brackets they will ever see. Paying taxes now on contributions is often cheaper than deferring taxes until retirement, when income and tax rates may be higher.
• Higher contribution limits than a Roth IRA – Unlike a Roth IRA, Roth 401(k)s allow the full $23,500 (2025 limit) regardless of income.
• Employer match still applies – Matches are normally always pre-tax, but this still boosts savings. A recent change to the tax code allows for Employer match to be after-tax, though there has been little adoption to date. Ask your 401(k) provider if they allow this!
• No income limits – High earners may be phased out of Roth IRAs, but anyone with access to a Roth 401(k) can contribute.

Best Use Case: Early-career savers who want to maximize tax-free retirement income later, or those who expect higher earnings and higher tax brackets in the future.

What is a Roth IRA?

A Roth IRA is an individual account funded with after-tax dollars, growing and distributing tax-free in retirement. It’s ideal for younger workers who may not yet have access to a workplace plan.

Key features:

• Contribution limits – $7,000 annually (2025) for those under 50, or up to actual earned income if less.
• Flexibility – Contributions (not earnings) can be withdrawn at any time, making it a backup for emergencies or big purchases.
• Parental support – Parents can contribute on behalf of children with earned income, making it a great family wealth-building tool.
• Income restrictions – High earners may face contribution limits, unlike with a Roth 401(k).

How Adults Can Support Young Savers

Parents and mentors can help the next generation by:

• Encouraging even small contributions early to take advantage of compounding.
• Explaining the tax trade-offs between Traditional vs. Roth options.
• Helping with account setup and reinforcing the importance of consistent saving.
• Offering to “match” contributions as a teaching tool.

Conclusion

For young workers, saving through a 401(k), Roth 401(k), or Roth IRA isn’t just about retirement—it’s about building the habits of financial independence. By starting early, taking advantage of employer matches, and understanding when Roth strategies make sense, young adults can secure decades of tax-advantaged growth.

The first paycheck isn’t just for today—it’s the foundation for tomorrow.

Emerald Advisors, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.