Why you need to know this: If you ever leave your job, you need to figure out what to do with your 401(k).

When I quit my fancy startup job and left behind all my lovely benefits — my health insurance, stock options and 401(k) matching — to work for The Awl Industrial Complex, I had to figure out what to do with my 401(k). If we started a new company 401(k) plan with excellent and cheap investment options, I might have rolled the money from my old retirement account into that alternative. Of course, creating a 401(k) plan is pretty much out of the question when you’re bootstrapping a website from scratch, but this actually makes my life easier! I can just roll my old 401(k) into a Roth IRA from a brokerage firm of my own choosing.

And if you have ever left a job, this is a thing you should do! You need to rollover your 401(k) into an IRA, because you don’t want your money sitting in your old company’s investment plan (unless that plan is amazing, but the odds are that it isn’t). If you don’t do anything, you’ll miss out on better investment opportunities, or your old company might cash you out of their plan, and send you a check. This might sound awesome (a check!), but it is actually terrible! Because unless you’re 59 1/2 years old, the IRS counts this as an early withdrawal, and you will have to pay income tax on that money, plus a 10 percent penalty.

So! Roll it over. It’s really easy. Here’s what you do: 

Step One: Open up an IRA at the brokerage firm of your choosing (more information here).

Step Two:  Call the customer service line for the brokerage firm where you are opening your IRA account and tell them you’d like to rollover your 401(k) into an IRA. This is a very common request — and they want you to trust them with your money! — so they’ll walk you through everything you need to do and answer any questions you may have.

Step Three:  Have the account information where your old 401(k) resides readily available. Customer service may be able to call your old 401(k) company and get everything settled in one simple, painless phone call.

Step Four: Fill out any paperwork your new brokerage firm requires from you. If the customer service representative hasn’t been able to get your old company to transfer the cash to your new account, you’ll have to call the customer service line at your old company and ask them to transfer your funds into your new IRA. Don’t let your old company send you a check (see terrible penalties above).

You’re good to go! Now all you have to do is remember to continue making your contributions, manage your investments, and dream about all the things you can do with your money when you’re ready to retire.

Why you need to know this: Because you should know what stocks, bonds, and mutual funds are so you can make the right investments and be a rich old person.

So you’ve read this thing on how compound interest will make you rich one day, and decided to open an IRA. You should be proud of yourself. I am proud of you!

So now you get to the fun part where you invest in your IRA and watch your money grow. But first some basics on what you’re investing in. 

Stocks: A share of stock is a tiny piece of a publicly-held company. Stocks are risky, which means bigger returns or losses on your money, depending on how your stocks are performing in the market. The more stocks you own, the more aggressively you’re investing. Remember, it’s common to invest aggressively when you’re young, and more conservatively as you age and near your retirement. You can invest more conservatively by investing in bonds.

Bonds: A bond is a loan from an investor to an entity (companies, cities, states, U.S. and foreign governments, etc.), which uses the loan to finance projects. These entities pay interest rates on these loaned funds. Bonds are considered a safer bet than stocks.

Mutual Fund: A mutual fund is what you’ll be investing in, and they’re generally diversified, meaning the fund’s portfolio contains a mix of stocks, bonds, and other assets (i.e. real estate). You’ll want to make sure the funds you are investing in have a broad mix, though you can totally choose more stocks, if you want to be aggressive.

Here’s what you should know before putting your money into a fund:

Minimum Investment: Some funds require a minimum amount of money for you to start investing, say $1,000 or $3,000. Don’t sweat it so much. There are other funds that don’t require a minimum dollar amount.

Expense Ratio: This is what it will cost you to invest in a fund, and is generally shown as a small percentage of the assets in a fund. When choosing funds for the first time, you should probably make sure the expense ratio is under one percent.

Load: When you start investing, you’re going to be buying and selling funds. A load is what it will cost you to do these transactions, so make sure there aren’t any loads when choosing a fund (it should say: “none”).

What to use when you’re researching funds: Morningstar.com — which will tell you all about diversification, minimum investments, expense ratios, and loads. Overviews are free to check out.

Overwhelmed and need suggestions on where to start? Here are two recommendations:

Vanguard’s STAR fund: This is the one fund that Morningstar’s director of personal finance Christine Benz recommends to start with. Mix: 60 percent stocks, and 40 percent bonds. Expense Ratio: 0.34 percent.  Load: none.

Vantagepoint Model Portfolio Long-Term Growth fund: I asked financial planner Jay Hutchins for a recommendation for a solid fund young people should get when starting out, and this was his suggestion. Expense ratio: 0.96 percent. Load: none. This is an aggressive fund that is largely made up of stocks, which is good for young investors.

Also helpful: The Best Mutual Funds according to the U.S. News Mutual Fund Score.

Why you need to know this: A Roth IRA is the retirement account financial planners say all young people should have.

I don’t know how to stress this enough: If you’re not already saving for retirement (i.e. through a 401(k) plan at work) open an IRA account. Do it.

An IRA is an Individual Retirement Account, and putting money into an IRA is the easiest way to have lots of money when you’re ready to retire (because of this thing called compound interest that I’ve already talked about).

Okay, stay with me because this might get boring, and I’m trying not to make this boring. I want you to have more money than you ever dreamed of when you’re an old person, and IRAs make this possible. You might be thinking, ugh, retirement. That’s like, 40 years away, and I don’t want to even think about it right now!

Don’t think that. That’s dumb. I know it’s worth it to put money into a retirement account when you are in your twenties, because I have a retirement account that I opened when I was 25, and there is so much more money in that account right now than I originally put in it. 

There are two types of IRAs: A traditional IRA and a Roth IRA. A traditional IRA works very similarly to a 401(k) in that you can put tax-free money into an investment account. You only pay taxes when you withdraw the money during retirement.

A Roth IRA uses after-tax money, which means you can invest money that’s already been taxed from your paycheck, and you won’t have to pay any taxes when you withdraw the money during retirement. A Roth IRA is also the investment account that almost every financial person says a young person should have. So if you’re choosing between a traditional and a Roth IRA, you should definitely open a Roth. The current limitation is that you can’t invest in a Roth if your adjusted gross income is more than $125,000 as a single person, or $183,000 as a married person, but I’m guessing that if you are a young person reading this, that’s not going to be an issue (but if you are earning more than that — whoa, congratulations, put your money in a traditional IRA).

Other things to know about a Roth IRA:

• You can’t contribute more than $5,000 a year into a Roth IRA (or $6,000 if you’re over 50). You can contribute to both a Roth and a traditional IRA, but the sum can’t equal more than $5,000 ($6,000 if you’re over 50). The deadline to contribute to your Roth IRA is the same as the tax deadline. So if you want to make a contribution for 2011, you have until April 15, 2012 to do it.
• You will have to pay a penalty tax if you withdraw any earnings from your Roth IRA before you are 59 and a half years old. But, you’re allowed to withdraw the money you invest in the account at any time without a penalty. So if you put $5,000 in a Roth IRA, you can withdraw that $5,000 any time you want (But, don’t do that. The whole point of putting your money into an IRA is to earn more money. You won’t earn more money if you take it out).
• If your account has been open for at least five years, you can withdraw up to $10,000 — including earnings — to buy your first home. This is another reason why you should open an account as soon as you can.

How to open a Roth IRA account:

Before opening a Roth, Jay Hutchins, a financial planner in New Hampshire, tells me that you should make sure you have some sort of emergency fund set up. You need something to fall back on in case of an emergency, and your Roth IRA shouldn’t be it. Also, don’t ignore your credit card debt. Make an effort to eliminate that debt while you’re investing in your IRA.

Okay, now that we’ve got that settled, you’ll need the following things to open an account:
• Your social security number
• Your driver’s license or another form of ID
• Your bank account information (routing and bank account numbers)
• Your employment information (name and address)
• Names, social security numbers and birthdates of people you want to designate as your beneficiaries (who you want to have your money if you are dead)

Next, figure out where you want to open your Roth IRA. You can use a discount brokerage company like E*Trade, or Schwab. Discount brokerage firms charge clients lower fees, but sometimes offer fewer services than bigger brokerage firms (liking offering investment advice). Or you can open an account at one of the big three firms — Fidelity, Vanguard and T. Rowe Price — which provide much more services (personally, I chose one of the the big three — Vanguard — because I like having more options available). Some firms will require that you have at least $1,000 available to deposit to open an account, but there are also other plans available for people who are starting out with less than that. T. Rowe Price, for example, has a program that allows you to invest as little as $50 a month in a Roth, as long as you sign up for an automatic investment plan.

Once you’ve figured that out, you can open an account online, over the phone, or at a brick and mortar location. The rest of the process should be easy because whoever is helping you will explain everything you need to do.

The last thing you’ll have to do is choose investments for your account. You can ask your brokerage firm for advice, and do some research using Morningstar, a financial data provider. Christine Benz, director of personal finance at Morningstar, says that if there is one single fund she recommends, it’s Vanguard’s STAR fund, which is a balanced fund consisting of 60 percent stocks, and 40 percent bonds with moderate market risks.

You’re off and running! Congrats — you’re now ahead of the game.

Recap!
• There are two types of IRAs, traditional IRAs, and Roth IRAs. A traditional IRA works similarly to a 401(k) in that it uses pre-tax money for investments. You will pay income taxes on money you withdraw during retirement. A Roth IRA uses after-tax money for investments, which means you won’t have to pay any taxes on money you withdraw during retirement.
• A Roth IRA is the investment account that most financial advisors suggest young people have.
• You cannot open a Roth IRA if you earn more than $125,000 as a single person, or $183,ooo as part of a married couple.
• You cannot contribute more than $5,000 a year into a Roth IRA ($6,000 if you’re over 50). The annual deadline to contribute to your IRA is the tax deadline: April 15th.
• You will have to pay income taxes and a 10 percent penalty tax if you withdraw earnings from a Roth account before you are 59 ½ years old.
• If your Roth account has been open for five years, you can withdraw up to $10,000 from your account to buy your first home.

Why you need to know this: If you work for a company that provides 401(k) benefits, you should participate in the plan.

So you have a job at a company. Awesome, you’re earning money! And that company’s benefits include a 401(k). Lucky you! A 401(k) is a company sponsored retirement account, and you should take full advantage of it because you know that the sooner you start socking money away into a retirement account, the more money you’ll have when you’re an old person.
A 401(k) is a way to put pre-tax money into a retirement account, meaning this is money from income which you haven’t paid taxes. This is great because it allows you to take a portion of your paycheck and invest as much of it as possible before taxes are taken out. You’ll pay an income tax when you withdraw this money during retirement.

Getting started is also really easy because all you have to do is ask your company’s HR representative (or whoever is in charge of payroll) to get you enrolled, and set up an automatic payment plan so that the money is automatically deducted from your paychecks and deposited into your 401(k). It’s easy, just say, “I want X dollars from every paycheck deposited into my 401(k),” and boom, you are good to go. 

Companies usually give you a packet of information about your 401(k) benefits during some sort of employee orientation. Don’t pay too much attention to it because that literature is usually dense and filled with complicated jargon, which might intimidate you and make you put off investing in your 401(k). Don’t let this happen! Seriously, all you need to do is talk to your HR person for five minutes to get you set up and explain all the important key things. My last HR person was named Mo, and he was great because he set me up and told me the minimum amount I needed to invest every month from my paycheck to get a full match from the company.

Speaking of which, If your company offers you a 401(k) match, make sure you get every cent of it! As an incentive to get you to put money into your 401(k) some companies will offer you a dollar for dollar match up to 3 percent of your salary (that’s typical, some might even give you more). So, for example, if you earn $50,000 per year, your company match for the year will be $1,500, and that money will be put into your account if you contribute at least $1,500 (a mere $125 a month) into your 401(k) for a total investment of $3,000. It’s basically free money! So be sure you’re contributing enough to get a full match.

Oh, what’s that? You want to be an overachiever and invest more than what your company matches? Well, the IRS limits the amount you’re allowed to contribute into your 401(k). For 2012, the most you can contribute is $17,000, which is a lot of money, and if you’re putting that much away — good for you!

So what happens after your money goes into your 401(k)?

The money you contribute to your 401(k) goes into an investment account managed by an investing company like Fidelity, or ShareBuilder, or whatever company your workplace has decided to use. You can then choose from several investment options, for example, “conservative”, “balanced”, “moderate”, and “aggressive”. Don’t stress out about it too much, because your company should be narrowing down the best options for you. If you’re in your twenties or early thirties, people who know things about money (“financial advisors”) usually recommend that you invest as aggressively as possible because you’ll have more time to ride out the ups and downs of the stock market, and then invest more conservatively as you age and get near your retirement so that you don’t lose it all right before you want to stop working.

That’s pretty much it! Here’s a recap for people who like to skim:

Recap!
• A 401(k) is a employer sponsored retirement account
• You get to invest a portion of your paycheck into your 401(k) before it gets taxed
• Talk to your HR person to get you set up
• Figure out if your company offers a 401(k) match, and invest enough to get a match
• The most you can invest into your 401(k) in 2012 is $17,000. You can invest an additional $5,500 if you’re over 50.
• If you’re young, invest aggressively, because you’ll be able to ride out the ups and down of the stock market. Get more conservative as you age and near your retirement.

What To Avoid (aka, Don’t be dumb!):
• Not getting enrolled in your company’s 401(k) (Seriously, 25 percent of workers who are eligible for 401(k) benefits don’t sign up for it. These people are dumb. Don’t be dumb!)
• Not contributing enough to get a match (Your company is offering you free money, and you’re not taking it. Don’t be dumb!)
• Withdrawing money from your 401(k) before you’re 59 and a half years old because you’ll pay income taxes, plus a 10 percent penalty tax. This money is meant for your retirement, so the penalty is there to discourage you from withdrawing it to buy stuff now. (Don’t be dumb!)

Why you need to know this: Compound interest on your investments will make you totally rich.

Ugh, I know. Just reading the words “compound interest” makes me want to close this tab too, but do yourself a favor and learn about this now, because compound interest is the reason why I started saving for retirement when I was 25, instead of putting it off until I have a mid-life crisis at 35 and realize I need to start saving money or else I’ll have to work for the rest of my life (you don’t want that). It’s the reason why I’m on my way to having a million dollars saved by the time I’m 65 years old.

“But, retirement is so far away!” you argue to yourself. “And I really want to use this money I saved to take a trip to China this summer to, like, really understand how all the gadgets I own are manufactured.”

Yeah, that’s really conscientious of you, but no. You really need to start saving now, because if you do, you’ll be able to retire at a normal age and do all the traveling you want while flying first class on all the best hovercrafts (this is what I’m guessing the world will look like in the year 2045 and I am a retired person). The earlier you start putting money into a retirement account, the more interest you’ll accumulate over time. This is called compound interest, or earning interest on top of the interest you earned in previous years.

Let’s say you’re 25 years old, and you put away $300 a month into an individual retirement account (IRA), and your account earns you an average of 8 percent each year. If you did this regularly for the next 40 years, you would have contributed a total of $144,000 in your account, but would have a little over $1 million saved by the time you were 65. Congratulations, you’re a millionaire! 

Here’s what I just said in chart form, because we all love charts:

But if you waited until you were 35 to start putting $300 a month into a retirement account, you would have about $440,000 saved by the time you were ready to retire at 65. Waiting 10 years to start saving would cost you $567,000. Math! This is why saving as early as you can is so critical.

Even if you were to put a one-time deposit of $5,000 into a retirement account at 25, forget about it, and never deposit another dime, you’d still end up with about $109,000 when you retired at 65. Seriously, you guys, this is the magic of compound interest.

So for the sake your 65-year-old self, start saving. Do it. It doesn’t even have to be a lot. I wasn’t earning very much when I was 25 and first started putting money into a retirement account, but the point is that I was making myself get into the habit of saving regularly. I started with $100 a month, and now I’m socking away $400 a month. I’ll be seeing you on the hovercraft. Join me in first class, won’t you?