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1) 401(k) with a company match
If you're in an office where there's a company-sponsored 401(k) plan with an employer matching contribution, this should virtually always be the first place to devote every dollar that you can afford to lock away for the long term. Why? Easy -- you're staring at free money, and free money is the type of thing you shouldn't just stare at -- you should take it. Say that your employer offers a 50% match for your 401(k) contributions. Every time that you put a dollar in that 401(k) account, your employer is contributing 50 cents on top of that. But if you don't contribute anything, your employer contributes nothing as well.

Hey, this is easy. Free money is the best investment around. There's no other legitimate investment we know of (and believe us, we receive a lot of scam emails with promises of easy riches) that really does give you a 50% return on your money on the first day. Even if the employer match is 25% or even 10%, free money is still the best place to start with your deferrals.

However, making your 401(k) the first stop applies only to those dollars you defer that have matching dollars joining them in your account. Check your plan. For instance, if the employer offers a match only up to the first $3,000 that you contribute annually, but you're contributing $5,000, those $2,000 unmatched dollars might well be put to even better use. Namely...

2) Roth IRA
The next place to turn after you've maxed out on getting the company match (free money) is $2,000 a year to a Roth IRA, as long as you qualify. (The requirements to contribute to a Roth IRA are that your modified adjusted gross income must be lower than $110,000 for single filers, or less than $160,000 for a married couple.) Similar to the 401(k), the Roth IRA provides tax advantages -- actually better ones than the 401(k). While you won't get any tax deduction on contributions to a Roth IRA when you make the contributions, the money will grow until you make withdrawals, and you won't have to pay any taxes when you take it out (assuming you follow the rules). The Roth IRA plan has such wonderful tax benefits that you'll want to use it each and every year that you can afford to.

Another benefit of the Roth IRA is that when you set it up with your discount broker, you have full control of where your money gets invested. You can purchase any individual stocks that you like, or you can select any index fund offered through that broker. So the control you have over how your money gets invested is much more preferable to the limited options contained in most 401(k) plans. (Details about Roth IRAs are available in our additional resources at the end of this lesson.)