Free Money for Retirement

If your company matches contributions, you’ve got a head start.

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.

Sandra Block
Senior Editor, Kiplinger's Personal Finance

Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.