401k and IRAs are tax-advantaged
- there are still taxes to be paid, it's just a matter of when it gets paid, and what gets taxed.
These accounts are just "holding areas," like financial suitcases, where investments (mutual funds, stocks, bonds, money market funds) can then be placed.
Standard 401k: The money goes into the account before it's taxed, so it also saves you some money on your federal income tax. When you take money out of it when you're of sufficient age, it is then taxed as income. You are not
taxed directly on dividends or interest payments (from bonds) made on holdings within that account.
Traditional IRA: I think this works similarly...contributions to the tIRA can be deducted from your income. Not 100% sure on that one...
Roth IRA: You pay taxes on your income like normal, then you can put money into the Roth IRA. The funds within the IRA then grow without taxation, and in addition to that, you pay no taxes on disbursements from the account.
So you've got the "pay taxes now" and "pay taxes later" options. I commonly see it suggested to first contribute to the 401k account to max out the employer match, if any, and then push money into a Roth IRA. However
, I also see that this is typically recommended if a 401k plan has poor investment options available; even then, an employer match usually represents an instant return of 50%-100%, depending on how much they match, and that kind of return is darn difficult to find anywhere else.
Taxable account: A regular investment account. You pay taxes on capital gains or interest from bonds. This is typically saved until the tax-advantaged space is full.
Opening a Roth IRA: I thought it was pretty simple to open. I've got mine through Vanguard. Open a New Account, and then it'll take you through prompts about what kind of account you want to open. Once the account is created, you then have the option there to buy funds. You may buy directly from Vanguard, or your company of choice, or create a brokerage account there and buy other funds, though there may be a fee for the latter option. Vanguard's Investor-level funds start at either $1000 or $3000 minimums.
From there, you can set up automatic contributions. Just stay under the limits - $5500/yr for IRAs (total, so if you've got a Roth and a tIRA, the total IRA contributions can't go above that), and $17500 for a 401k. Some special conditions do exist for 401k's; I'm not too familiar with them right now though, as those conditions have not applied to me yet. (High-income earners, or people over 50.)
I thought it was a fairly painless process for the sign-up and contributions. Just as recently as last November or so, I was where you were. While I'm certainly not about to call myself an "expert," I'm getting the idea that investing in low-cost mutual funds puts me in about as good a position as I can expect to be in. (And who knows, maybe there's still value in hearing from another newcomer to this.)
I'm invested in the Total Stock Market and Total Bond Market index funds in the Roth IRA, and then some higher-cost American Funds mutual funds in my 401k (I've got to settle with the "least-bad" options there, as they've all got expense ratios of >1.3%). I contributed there to get the employer match (50% for up to 4% of salary, so effectively a 2% pay raise put away for the future), then filled the IRA, and now I'm pumping up the 401k some more.
If you don't use up those bits of tax-advantaged space each year ($5500 for the IRA, and $17500 for the 401k), it's gone for good - no rollovers on the unfilled portions.