Why is there such disparity of max contribution limits between 401K accounts and regular IRA accounts?
The 401k was not written with the specific intent of enabling retirement savings.  Why do tax advantages favor employees of large employers... It seems that large businesses have been more effective at influencing legislators despite that there are more people are employed by small than large businesses. IRAs were invented to help individuals save for retirement. 401(k)s were invented to help corporations provide more compensation to highly valued employees. The investments offered in 401K are usually limited to a selection of mutual funds offered by a 401K provider.  The 401K providers and the mutual funds charge fees.  The mutual fund industry has a lobbying group that will push for increased 401K contributions to direct money into their mutual funds to collect fees.  The top 401 K provider in 2005 was fidelity.  It managed $337 billion in 401Ks of which $334 billion was directed into mutual funds. Although I would have to use some of the same providers to open an IRA, I would not have to invest in the providers' mutual funds when I open an IRA.  I can buy a stock and hold onto it for 10, 20, 50 years inside of my IRA.  Thus, the only fee the investment company would collect from me would be from when I purchased the stock and when I sold the stock.  Not nearly as profitable as mutual fund fees.
Does your employer provide a matching contribution to your 401k?  If so, contribute enough to the 401k that you can fully take advantage of the 401k match (e.g. if you employer matches 3% of your income, contribute 3% of your income).  It's free money, take advantage of it. Next up, max out your Roth IRA.  The limit is $5000 currently a year. After maxing your Roth, revisit your 401k.  You can contribute up to 16,500 per year. You savings account is a good place to keep a rainy day fund (do you have one?), but it lacks the tax advantages of a Roth IRA or 401k, so it is not really suitable for retirement savings (unless you have maxed out both your 401k and Roth IRA). Once you have take care of getting money into your 401k and Roth IRA accounts, the next step is investing it.  The specific investment options available to you will vary depending on who provides your retirement account(s), so these are general guidelines. Generally, you want to invest in higher-risk, higher-return investments when you are young.  This includes things like stocks and developing countries. As you get older (>30), you should look at moving some of your investments into things that less volatile.  Bond funds are the usual choice.  They tend to be safer than stocks (assuming you don't invest in Junk bonds), but your investment grows at a slower rate. Now this doesn't mean you immediately dump all of your stock and buy bonds.  Rather, it is a gradual transition over time.  As you get older and older, you gradually shift your investments to bond funds. A general rule of thumb I have seen: 100 - (YOUR AGE) = Percentage of your portfolio that should be in stocks Someone that is 30 would have 70% of their portfolio in stock, someone that is 40 would have 60% in stock, etc. As you get closer to retirement (50s-60s), you will want to start looking at investments that are more conservatie than bonds.  Start to look at fixed-income and money market funds. "First off, I highly recommend the book Get a Financial Life.  The basics of personal finance and money management are pretty straightforward, and this book does a great job with it.  It is very light reading, and it really geared for the young person starting their career.  It isn't the most current book (pre real-estate boom), but the recommendations in the book are still sound.  (update 8/28/2012: New edition of the book came out.) Now, with that out of the way, there's really two kinds of ""investing"" to think about: For most individuals, it is best to take care of #1 first.  Most people shouldn't even think about #2 until they have fully funded their retirement accounts, established an emergency fund, and gotten their debt under control. There are lots of financial incentives for retirement investing, both from your employer, and the government.  All the more reason to take care of #1 before #2! Your employer probably offers some kind of 401k (or equivalent, like a 403b) with a company-provided match.  This is a potential 100% return on your investment after the vesting period.  No investment you make on your own will ever match that.  Additionally, there are tax advantages to contributing to the 401k.  (The money you contribute doesn't count as taxable income.) The best way to start investing is to learn about your employer's retirement plan, and contribute enough to fully utilize the employer matching. Beyond this, there are also Individual Retirement Accounts (IRAs) you can open to contribute money to on your own.  You should open one of these and start contributing, but only after you have fully utilized the employer matching with the 401k.  The IRA won't give you that 100% ROI that the 401k will. Keep in mind that retirement investments are pretty much ""walled off"" from your day-to-day financial life.  Money that goes into a retirement account generally can't be touched until retirement age, unless you want to pay lots of taxes and penalties.  You generally don't want to put the money for your house down payment into a retirement account. One other thing to note:  Your 401K and your IRA is an account that you put money into.  Just because the money is sitting in the account doesn't necessarily mean it is invested.  You put the money into this account, and then you use this money for investments.  How you invest the retirement money is a topic unto itself.  Here is a good starting point.  If you want to ask questions about retirement portfolios, it is probably worth posting a new question." Your 401k IRA will now have three different sub-accounts, the one holding your Traditional (pre-tax) 401k contributions, the one holding your Roth 401k contributions, and the one holding the employer match contributions (which, as has been pointed out to you, cannot be considered to be Roth 401k contributions). That is, it is not true that So my next month's check shows $500+$500 going to the regular 401k, and $82+$82 going to the Roth 401k. Your next month's paystub will show $500 going into the regular 401k, $100 going into the Roth 401k, and if employer matching contributions are listed on the paystub, it will still show $600 going into the employer match. If you have chosen to invest your 401k in mutual funds (or stocks), shares are purchased when the 401k administrator receives the money and are also segregated in the three subaccounts. If you are paid monthly, then you will know on a month-by-month basis how many shares you hold in the three  separate subaccounts, and there is no end-of-year modification of how many shares were purchased with Roth 401k contributions versus how many were purchased with  pretax contributions or with employer matching funds as you seem to think. Other answers here cover some of the basics, but this is also a great time to start establishing a credit history and developing good financial habits to carry throughout your life. In addition to opening a free checking account with the local credit union, establish an overdraft line of credit on that account. Never close this account or this line of credit as it will work to increase the average age of your accounts when you apply for credit later in life. If you are disciplined with your use of credit cards, you may also want to apply for a low limit credit card through the same credit union for the same purpose as above. Never carry a balance on this card, but make minor purchases with it each month, never more than 20% of the balance, maybe just buy gas with it. Start tracking all of your spending and make a monthly budget. There are a lot of online tools that make this very easy. Establishing the habit now will help you make informed financial decisions in the future. Open a Roth IRA and put at least 10% of your money away for retirement. In the future your income may increase enough to put you in the 25% tax bracket. If that ever happens, open a Regular IRA and put the money there instead. Also when you have employers that offer 401k matching do the same thing with a Roth 401k account. Keep your money invested in a low cost index fund. You will normally have somewhere to designate which tax year you are contributing for when you make your contribution (either online or at the bank).  This designation is only required from Jan 1 - Apr 15 of each year, as any contributions before / after those dates will necessarily be for the calendar year that you contribute. You must make sure that your tax forms (1040 and anything else) show your total contribution for the tax year.  If you've put $1000 into your Roth IRA during the calendar year for 2010, and then you put in $2000 in March 2011 (but designated for 2010), you need to show the IRS that you put $3000 into your Roth IRA. As stated in another answer, the advantage is increasing the overall contribution limit in your lifetime.  If you open a brand new Roth IRA in March 2011, you can contribute $5000 for 2010 and another $5000 for 2011.  If you open the same account in May 2011, you are limited to only $5000 for 2011. You won't get taxed twice because it's different money going into each account type. In the Roth you've put after tax earnings and those will continue to grow tax free (assuming you wait til 59.5 to start your withdraws). The traditional IRA is going to be funded with your old 401k, which was funded with pre-tax dollars they took from your paycheck. So you'll still pay taxes on the back end for the traditional IRA (money you've never been taxed on) but your Roth has money where tax has already been taken out so no extra tax there. You can have both types of accounts, it's pretty common considering most 401k plans are pre tax but many people see the benefit of a Roth as greater than the tax write off you get from the 401k, but if your company matches you're not gonna leave free money on the table. Hope that helps. "Yes, the annual contribution ""limits"" are effectively higher for Roth accounts than for the corresponding Traditional account, if that is what you are referring to, since the ""nominal"" limit is the same, but for Roth it's after-tax money, while for Traditional it's pre-tax money, which is equivalent to a lesser amount of after-tax money." Companies are required BY THE IRS to try to get everybody to contribute minimal amounts to the 401K's.  In the past, there were abuses and only the execs could contribute and the low paid workers were starving while the execs contributed huge amounts.   On a year-by-year basis, if the low-paid employees don't contribute, the IRS punishes the high paid employees.  Therefore, most employers provide a matching program to incentivize low-paid employees to contribute. This 9% limitation could happen in any year and it could have happened even before you got your pay raise, what matters is what the low-paid employees were doing at your company LAST YEAR.