Free Money for Retirement

Even modest contributions to a savings plan could mean the difference between retiring comfortably and never being able to retire at all. The good news is that most big companies, and many small ones, offer a 401(k) plan. If you work in the public sector, you may be offered a 403(b) or 457 plan; the federal government’s version is called the Thrift Savings Plan.

Money is automatically deducted from your paycheck and invested in a portfolio of mutual funds or other investments. Your contributions will grow, tax-deferred, until you withdraw the money. In 2015, you can contribute up to $18,000. That may be more than you can spare. But if your company matches contributions, you should contribute at least enough to get that match. The typical company match is 25% to 100% of your contribution, up to 6% of your salary.

More than half of large companies automatically enroll new employees in their 401(k) plans, forcing them to opt out if they don’t want to participate. But auto-enrollment plans typically set contributions at 3% of pay—well short of the amount you should be saving for retirement. Shoot for 10%, including the match.

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If you don’t have access to a company retirement plan, you’ll have to do a little more legwork. For most millennials, the best option is a Roth IRA (consider investing in one even if you have a retirement plan through your job). In 2015, the maximum you can contribute to a Roth IRA is $5,500. Contributions to a Roth are after-tax, but the money will grow tax-free. You can always withdraw contributions tax-free, and as long as you wait until you’re 59½ to dip into earnings, 100% of the earnings will also be tax-free.

A traditional IRA is another option. If you’re not covered by a retirement plan at work—or you’re covered but your modified adjusted gross income in 2015 is $61,000 or less, or $98,000 or less if you’re married and file jointly—you can deduct the full contribution (the maximum is the same as for a Roth). Self-employed workers can make even larger deductible contributions. If you open a SEP IRA, you can contribute 20% of your net earnings (your business income minus half of your self-employment tax), up to a maximum of $53,000 in 2015. A solo 401(k) lets you save even more. You can contribute up to $18,000 plus up to 20% of your net self-employment income, up to $53,000. For example, if you net $15,000 from a freelance job this year, you could contribute the full amount to a solo 401(k), but only $3,000 (20% of $15,000) to a SEP.

This story was originally published in the June 2014 issue of Kiplinger's Personal Finance.