How to Save for Retirement

Here’s how to save for retirement: Every year contribute the maximum amount of money the IRS allows you to in tax-favored retirement accounts — your standard workplace plan, like a 401(k) or 403(b), and an IRA (Roth, traditional, whatever) — and funnel any extra into a regular brokerage account.

There ya go. You just saved at least $30,000 for retirement this year!

'Scuse me?

Perhaps you don’t have a spare $30,000 to earmark for retirement savings every year. Perhaps you’re thinking: “Excuse me, I appear to be in the wrong place. Where is the advice for real people?”

Don’t worry, you’re in the right place.

This article answers the key tactical questions about saving for retirement — “Which account should I fund first and how much of my savings should go into it?”, “And after that?” and “Then what?” — for however much money you can afford to save and whichever account types are available to you.

Your 4-step retirement savings roadmap

To the show-offs super savers out there, your retirement savings roadmap may simply require one step: Max out every tax-favored retirement savings account at your disposal. In 2024 the IRS allows savers to contribute $23,000 in a 401(k) and $7,000 in an IRA. If you’re 50 or older, you can take advantage of catch-up contributions that allow you to invest an additional $7,500 in a 401(k) (for a total of $30,500), and an extra $1,000 in an IRA ($8,000 total). (You may now move freely about the cabin and check out Investing for Retirement to further enhance your retirement savings journey.)

Everyone else: Having a limited amount available to save each year requires being a bit more strategic about the order in which you fund your retirement accounts.

A typical hierarchy of savings looks like this:

• Start with your 401(k) or other workplace retirement plan.
• → next, fund an IRA.
• → go back and top off your workplace plan .
• → put any additional savings in a nondeductible IRA and/or taxable investment account.

Having a limited amount available to save each year requires being a bit more strategic about the order in which you fund your retirement accounts.

But not everyone has access to a workplace retirement plan, let alone one that offers matching contributions. And maybe your tax situation is such that you don’t qualify for a fully deductible IRA, or make too much money to contribute to a Roth IRA. That’s OK — just skip to the step that applies to you.

No matter what your situation, here are the turn-by-turn directions on how to save for retirement.

Step 1: Invest in your workplace retirement plan — like a 401(k) or 403(b) — up to the point where you receive the full company match

Starting your retirement savings journey at your place of employment ensures that you don’t leave any free retirement money on the table. A Deloitte survey found that 85% of companies with a defined contribution plan (401(k)s and the like) contributed money to employee retirement accounts.

The “employer match” formula — how much a company kicks into your retirement account and under what circumstances — can vary. (See the FAQs below for more.) But if your boss offers at least a little somethin’-somethin’ out of its own pocket to encourage you to save, your first order of business is to do what it takes to qualify for the entire free kickback — which usually means contributing a specific percentage of your income.

Step 2: Contribute the full amount you’re allowed to a deductible traditional IRA or a Roth IRA

After you’ve invested enough money in a workplace plan to snag the company match, an IRA (individual retirement account) is the next logical vessel for your retirement savings.

IRAs give you more freedom than workplace retirement plans in certain key areas:

• More investment choices: IRAs offered by brokerages provide access to a broad array of mutual funds, stocks, ETFs, bonds and more, whereas workplace retirement plans offer a limited menu of investment options.
• Control over fees: Another bonus of investment independence in an IRA is that fees are under your control. (Yes, 401(k) plans charge fees, as do the mutual funds offered within the plan.) With more investments to choose from, you’re able to comparison shop across a broader selection of offerings.
• A choice of tax break: Many employers offer both regular and Roth 401(k)s, but the default is a regular 401(k), where the tax rules mimic those in a traditional IRA. With an IRA you have the option to invest in a Roth IRA or traditional IRA or both (assuming you qualify to contribute to both).

Keep in mind that deductible traditional IRAs and Roth IRAs come with eligibility restrictions which we spell out in plain English here.

Step 3: Top up your workplace retirement plan contributions until you max out the account

How did we end up back here? Even after you’ve captured the employer match — and even if your company provides no contributions — a workplace retirement plan still has much to offer the retirement saver, mainly a bigger umbrella to protect your money from taxes.

• High contribution limits = bigger tax savings: Annual 401(k) contribution limits are much higher than IRA contribution limits — $16,000 to $22,500 higher, depending on your age. Simply by virtue of size, these accounts allow you to shield more of your retirement savings from taxes than you can in an IRA.
• Access to lower-fee investment choices (potentially): Here again, size has its advantages. Larger plans with lots of assets (buying power) may qualify for access to mutual funds that have lower management fees than what you’re offered as an individual investor through an IRA, mainly because such funds have higher investing minimums to qualify for reduced fees.
• Access to Roth savings (potentially) if you don’t qualify for a Roth IRA: Unlike the Roth IRA, Roth 401(k) eligibility is not based on income. Anyone, regardless of how much they earn, is allowed to contribute to a Roth 401(k). The catch is that your workplace plan must include the Roth account option in addition to the regular 401(k) one.

Step 4: Invest in a nondeductible IRA or taxable investment account for anything extra

After you’ve exhausted your tax-preferred retirement savings options, there are two remaining investment buckets to fill. (p.s.: Standing ovation for you for digging deep to find money to save for your future!) You can choose one or both of these options:

• A nondeductible traditional IRA: Unlike the Roth IRA, anyone with earned income is allowed to invest in a traditional IRA up to the maximum the IRS allows, which in 2024 is $7,000, or $8,000 if you’re 50 or older. But not everyone qualifies for the full upfront deduction that reduces your taxable income.
  
  Still, even if you’re limited to a partial deduction of your contribution — or none at all — the money you save in a traditional IRA offers some tax protection. You pay no annual taxes on investment gains while the money remains in the account. In retirement, withdrawals of your contributions are tax-free (since you didn’t get the upfront deduction and the IRS mercifully won’t tax you twice). You will, however, owe income taxes on any gains you withdraw. You’ll need to file a form with the IRS each year (specifically, Form 8606) to report your nondeductible contributions, which helps make it easier to figure out what portion of your withdrawals is taxable when the time comes to take the money out.


• A regular investment account (aka non-retirement account or regular brokerage account): At first glance, a regular investment account may not appear to have much going for it — it doesn’t provide any tax breaks on contributions or withdrawals, or tax protection on investment growth and dividends. However, it still offers an extremely valuable perk for retirement savers: Access to mutual funds, stocks, ETFs and other investments. These investments have the potential to out-earn what you’d get if you stuck your savings in a regular bank account.
  
  Taxwise, you’re required to report any gains you get from selling investments, plus interest and dividend income. But — silver lining alert! — those gains might qualify for long-term capital gains tax rates, which are generally lower than income tax rates. Plus, if you have investment losses, those can be used to offset your gains and potentially reduce your taxable income for the year.
  Because non-retirement investment accounts aren’t subject to the same rules as IRAs, you don’t have to worry about age restrictions on withdrawals. There are no penalties for accessing the money before age 59½.

Here’s all of that tax, no-tax, capital gains, income taxes, gobbledygook in table form:

Nondeductible IRA vs. taxable investment account

*Contributions to all IRAs combined (deductible, Roth, non-deductible) cannot exceed annual IRS limit

Time for a quiz!

How does an employer match work?

Employers are not required by law to offer matching contributions in their retirement plans, but roughly 85% of plans do, according to a Deloitte survey.

The formulas companies use to determine how much they contribute vary, but the most common are partial and dollar-for-dollar matches. Some particularly benevolent employers kick money into worker accounts (a non-matching 401(k) contribution) even if the employee doesn’t chip in anything.

What is a partial 401(k) match?: The most common matching structure is a partial match. It means an employer puts in a matching contribution equal to a portion of the amount an employee saves, up to a set percentage of the worker’s salary.

Example of a partial 401(k) match: Let’s say an employer matches 50 cents of each dollar you contribute, up to 6% of your salary, and you earn $60,000. In order to take full advantage of the match, at that salary you’d contribute $3,600 (6% of your earnings) to your plan and the employer match would be $1,800 (50 cents of each dollar). Any money you contribute that’s more than 6% of your earnings will not get a company match.

What is a dollar-for-dollar 401(k) match?: Like it sounds, a dollar-for-dollar match means an employer contributes the same amount (100%) of the employee’s contribution. The matching amount is capped at some specific percentage of the worker’s salary, usually between 3% and 6%.

Example of a dollar-for-dollar 401(k) match: A common matching formula is a 3% dollar-for-dollar match. So if you earn $60,000 and contribute 3% of your pay ($1,800) to your 401(k), your employer would also kick in $1,800 to your account. On a 6% dollar-for-dollar match both you and your employer would contribute $3,600 a year to your workplace retirement account, with any additional money you save receiving no company match.

Besides the matching formula, you want to know if there is a vesting schedule. Any money you contribute to a 401(k) plan is yours forever. The company match, however, may not be yours right away. If your 401(k) has a vesting schedule, the employer contribution will gradually become your money over a period of time — typically a handful of years. If you leave the company, you’ll leave behind any unvested employer contributions. (See also: golden handcuffs.)

Bottom line: If your employer offers matching contributions in its retirement plans, do what it takes to get the full match.

What’s the difference between a Roth and traditional IRA?

There are two primary differences between Roth IRAs and traditional IRAs:

1. How and when you pay taxes on contributions and withdrawals: Contributions to a traditional IRA are pre-tax, meaning you may be able to deduct the amount you save from your current year’s taxes (depending on some IRS-y things). Withdrawals in retirement are taxed as income.
   Roth IRA contributions are post-tax (you don’t get an upfront deduction), but withdrawals are completely tax-free.
2. How your eligibility to contribute is determined: Anyone can fully fund a traditional IRA, as long as you (or your spouse, if you don’t work) earn income in the year you make your contribution. Your ability to deduct the amount you save rests on whether you or your spouse has a workplace retirement plan. If one of you has access to an employer-sponsored retirement plan, then your household income and tax filing status determine whether you can deduct all, a portion, or none of your traditional IRA contribution.
   Roth IRA eligibility is based solely on how much you earn. Once you reach a certain income level, the IRS reduces and eventually zeroes out the amount you’re allowed to contribute.

There are other noteworthy differences (withdrawal rules) and similarities (account setup, contribution limits). We could go on and on about them … and we do in our comparison of Roth and traditional IRAs!

Which IRA is better, Roth or traditional?

Before we answer your question, please answer a few of ours:

• Do you want to lower your tax bill this year, or save your tax break until retirement? The main feature of traditional IRAs is the potential upfront tax deduction. Roth IRAs provide tax-free withdrawals down the road because you don’t get to deduct your contributions. If you’re not sure, then …
• Are you currently in a low tax bracket? The Roth IRA is often the go-to choice for those just kicking off their soon-to-be-illustrious careers. Assuming your earning power increases over time, the tax-free withdrawals from a Roth in retirement will pay off more than a present-day deduction you can get by choosing a traditional IRA.
• Are you currently in a high-ish tax bracket (e.g., 25% or more)? If you envision your income leveling out or going down in retirement, taking the upfront deduction offered by a traditional IRA may be the better tax move.
• Will you need to access your IRA savings before age 59½? The Roth IRA is friendlier for withdrawal early birds because it allows you to tap your contributions (not earnings) without paying the 10% early withdrawal penalty.

For more help deciding which IRA is best for you, check out our infographic on Roth vs. traditional IRAs:

investor.com Quick Tip: Can’t decide? Choose both!

The IRS allows savers to contribute to both a Roth IRA and a traditional IRA in the same year, as long as a) you qualify for both, and b) your total combined contributions do not exceed the maximum allowed per year (which for 2024 is $7,000, or $8,000 if age 50 and older).

What is a Roth 401(k)?

A Roth 401(k) is like a 401(k), but with different tax rules and an extra word at the front to help you tell the difference.

With a Roth 401(k) you settle your tax bill with the IRS upfront by paying your income taxes on the money you contribute to the account. Once in the account, your money grows tax-free. When you withdraw funds from your Roth 401(k) in retirement, you owe nothing to Uncle Sam because you already settled the tab upfront.

The tax scenario is flipped with a regular 401(k). Contributions are made with pre-tax dollars (versus post-tax ones), which lowers your taxable income for the year. As with a Roth 401(k), you owe no taxes on investment growth while the money is in the account. But you can only postpone paying taxes for so long. When you tap money from a 401(k) in retirement, you’ll owe taxes on the amount you withdraw.

Quick Comparison: Roth 401(k) vs. 401(k)

	Roth 401(k)	401(k)
2024 contribution limits	$23,000 ($30,500 if you’re 50 or older)	$23,000 ($30,500 if you’re 50 or older)
Taxes on contributions	Contributions are made with post-tax dollars that are included as part of your taxable income	Contributions made with pre-tax dollars, which lowers your taxable income for the year on a dollar-for-dollar basis
Taxes on withdrawals	Distributions are not taxed	Distributions are taxed as ordinary income
Best for	Those currently in a lower income tax bracket than they will be in the future	Those who expect to be in a lower income tax bracket in retirement
Other considerations	Not all companies offer a Roth account option in their 401(k) plans. You can contribute to both a Roth 401(k) and 401(k) at the same time, as long as your total combined contributions do not exceed the IRS’s annual limits. Income and other factors that limit eligibility and deductibility for Roth and traditional IRAs do not apply to their 401(k) counterparts.

» More: Make the most of your 401(k) options.

Can I invest in both an IRA and 401(k) at the same time?

Oh heck yeah! Not only does the IRS allow individuals to save in both a 401(k) and an IRA at the same time (up to the allowable limits for each type of account), but doing so elevates your retirement savings game by providing:

• A bigger upfront tax break: If you’re trying to cut your current tax bill, maxing out a 401(k) and traditional IRA in the same year can help you shield up to $30,000 in income ($38,500 if you’re 50 or older) from income taxes.
• A fatter tax-free income stream in retirement: While you get no upfront deduction on contributions to the Roth versions of an IRA and 401(k), you get a big reward on your retirement distributions: tax-free withdrawals. Doubling down with a Roth IRA and Roth 401(k) means less tax agita when you tap your retirement savings.
• Tax protection for more of your retirement portfolio: Unlike money held in a regular brokerage account, investment growth within IRAs and 401(k)s generate no annual tax bill, as long as the money is in the account. That translates to decades of no taxes, allowing more of your money to compound over time.
• The option to mix-and-match tax breaks: If your workplace only offers a traditional 401(k), investing outside of it in a Roth IRA buys you access to tax-free withdrawals in retirement. Similarly, if you make too much money to qualify for a Roth IRA, a Roth 401(k) (if offered by your employer) is your all-access pass, since there are no income restrictions.
• Access to different types of investments: Workplace plans offer only a limited menu of investment options, many of which may be perfectly suited to your needs. If you want to invest in individual stocks or certain mutual funds that aren’t on the 401(k) menu, an IRA provides that flexibility.

Now that you have a retirement account funding game plan, let’s dig into the money question: How much you should be saving for retirement.

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