Which account types should you use to save?
Employer plans, IRAs, annuities, and taxable accounts can all be used for retirement saving. Here's how you can get the most benefit.
1. Save up to the match in your employer plan
If your employer offers a retirement plan (like a 401(k) or 403(b) plan) and will match your contributions up to a certain percentage, make sure you get the full amount of free money that's available to you.
Good to know!
Over 96% of the retirement plans covered in a recent Vanguard study featured employer contributions. Make sure you enroll in yours!
Source: Vanguard, How America Saves 2018. This study examined employer retirement plans (and their participants) managed by Vanguard.
2. Open an IRA
It's great if you can save more than what's needed to get the maximum company match in your employer plan.
Opening an IRA for your additional savings will give you a chance to shop around. You can hold many types of investments in an IRA, including any mutual fund, ETF, stock, or bond—many of which might cost less than those offered through your employer plan.
And you can use a Roth IRA to save money that won't be subject to taxes in retirement—an option that isn't available in many employer plans.
The annual contribution limit for IRAs is $5,500 for most people, although it depends on your income. (If you're age 50 or over, you can contribute up to $6,500.)
Good to know!
If you have an employer-sponsored plan from a previous job, rolling it over to an IRA can give you additional flexibility and make your portfolio easier to manage.
3. Max out your contributions to your employer plan
After you've saved up to the match in your employer plan and maxed out your IRA, go back to your employer plan. The annual limit for employee contributions is $18,000 ($24,000 if you're age 50 or older and your plan allows catch-up contributions.)
4. Continue saving in a taxable account
For most people who want to save even more, the next step is to save in a general investment account.
These accounts won't have the tax breaks associated with retirement accounts, so you'll have to pay investment taxes on interest, dividends, and capital gains as your account grows, and you won't receive any tax deductions for your contributions.
Keep in mind
Open a retirement account
We offer several types of accounts you can use to save for retirement. Figure out which one is right for you.
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Get the basics: Saving for retirement
WHERE DOES RETIREMENT FIT INTO YOUR PRIORITIES?
HOW MUCH CAN YOU CONTRIBUTE?
The yearly, monthly, or weekly amounts you save in your account.
A type of account created by the IRS that offers tax benefits when you use it to save for retirement.
A type of investment that pools shareholder money and invests it in a variety of securities. Each investor owns shares of the fund and can buy or sell these shares at any time. Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed.
A type of investment with characteristics of both mutual funds and individual stocks. ETFs are professionally managed and typically diversified, like mutual funds, but they can be bought and sold at any point during the trading day using straightforward or sophisticated strategies.
A type of IRA that allows you to make after-tax contributions (so you don't get an immediate tax deduction) and then withdraw money in retirement tax-free as long as you meet the requirements.
Income you can receive by investing in bonds. The bond's interest rate is specified when it's issued.
The distribution of the interest or income produced by a mutual fund's holdings to the fund's shareholders.
Contributions you can subtract from your income on your tax return, resulting in a lower tax bill.
You won't pay any income taxes on the amount your account earns until you take the money out. (Note that with Roth accounts, assuming you meet all requirements, the earnings become tax-free at that time.)