How to Save for Retirement

Whether you're a traditional worker or self-employed, a great way to save for retirement is in a retirement savings account, such as an IRA or 401(k).

Unlike regular investment accounts, these accounts give a tax break on savings, either upfront or down the road when withdrawing in retirement. And in between, your investments are shielded from the IRS and grow without being taxed.

How to save for retirement in three steps

Depending on your employment status, you may have access to different types of retirement accounts.

If you're traditionally employed, consider starting with these steps.

1. Prioritize a 401(k) first.

There are a lot of perks to having access to an employer-sponsored retirement plan. A few of the biggies:

• It makes it easy to save on autopilot: Money is taken out of your paycheck.

• You may get paid to save: Many employers match a portion of employee contributions.

• It’s one of the biggest tax havens: The 401(k) allows individuals to save more than three times as much as in an IRA.

• Investment gains are tax-deferred: As long as the money remains in the plan, you owe nothing as it grows.

The downsides:

• Investment choices are limited: Investments available through a 401(k) are picked by the plan administrator and the selection is typically small.

• Fees can erode your returns: In addition to investment expenses (which are charged by the investments themselves, not the 401(k) plan), there may be administrative fees charged by the company that manages the plan.

The conclusion: Consider investing up to the match and pay attention to fees. Even if it’s a great plan, the money you contribute still lowers your taxable income for the year and you get tax-deferred growth on investment gains.

Once you leave your job, you might want to roll over the money into an IRA to take control. Here’s how to decide if that’s the right move and how to do a 401(k) rollover.

2. Contribute to an IRA.

There are other types of IRAs, but the two most common are the Roth and traditional IRA. The main difference between them is how taxes work:

• Traditional IRA: Depending on your income and whether you have access to a workplace retirement plan, the money you contribute may be tax-deductible. You fund the account with pretax dollars, and pay income taxes on money you withdraw from the account in retirement. Learn more in our guide to traditional IRA income and contribution limits.

• Roth IRA: Contributions are not deductible — the account is funded with post-tax dollars. That means you get no upfront tax break as you do with the traditional IRA. The payoff comes later: Qualified withdrawals in retirement are not taxed at all.

» More on the differences between the Roth IRA vs. traditional IRA

For most people, choosing between a traditional or Roth IRA starts with one question: When you retire and start drawing money from your investment accounts, do you anticipate that your tax rate will be higher than it is right now?

Not sure how to answer that question? That’s OK: Most people aren’t. For this reason, and the pluses outlined in the table above, you may want to lean toward the Roth.

If you believe your taxes will be lower in retirement than they are right now, taking the upfront deduction offered by a traditional IRA and pushing off taxes until later might be a solid choice.

Still undecided? You can contribute to both types if you’d like, as long as your total contribution for the year doesn’t exceed the annual limit.

Note: Some employers also offer a Roth version of the 401(k). If yours is one of them, follow this same line of thinking to decide whether you should contribute to that or the standard 401(k).

» Ready to get started? Learn how and where to open an IRA.

3. Return to a 401(k), if you can.

If you still have funds left over after maxing out your IRAs, consider continuing 401(k) contributions. The maximum you can contribute to your 401(k) plan is $23,000 in 2024 ($30,500 for those age 50 or older)

Saving for retirement as a nontraditional worker

If you're self-employed or do non-traditional work such as freelancing or temporary work, you can explore specific self-employed retirement plans.

Some examples of self-employed retirement plans to consider include:

• Solo 401(k): Ideal for a self-employed person or business owner with no employees. In 2024, you can contribute $69,000, plus a $7,500 catch-up contribution or 100% of earned income, whichever is less.

• SEP IRA: For self-employed people or business owners with few or no employees. You can contribute the lesser of $69,000 in 2024 or up to 25% of compensation or net self-employment earnings, with a $345,000 limit on compensation that can be used to factor the contribution. Contributions can be tax deductible, but there are limits.

• SIMPLE IRA: Suitable if you have a larger business of 100 employees or more. Contributions are deductible and you can contribute up to $16,000 in 2024.

» Learn more about self-employed retirement plans

The bottom line

Saving for retirement can feel daunting, but breaking it down into manageable steps can help. Understand what account options are available to you, how much you can contribute regularly, and what you'd like to invest in.