These plans have plenty of similarities, despite being offered by different types of employers in distinct industries. For example, they both offer traditional or Roth contributions, which differ when it comes to their tax advantages.
These employer-sponsored retirement plans are also similar in their contribution limits. For all three accounts, you can contribute up to $23,000 in2024. All three plans also allow your employer to make contributions on your behalf.
An individual retirement account (IRA) is a type of account you open on your own through a brokerage firm rather than through an employer. Like a 401(k) or another employer-sponsored plan, you can choose between traditional and Roth contributions. The current contribution amount for both traditional and Roth IRAs for 2024 is $7,000.
It’s also worth noting there are some restrictions with IRAs that don’t exist for employer-sponsored retirement plans. If your income is too high, you may be prohibited from deducting your traditional IRA contributions or from contributing to a Roth IRA. For example, if you or your spouse do not have a 401k or other retirement plan at work, you are able to deduct your contributions regardless of income; however, if you or your spouse do have a retirement plan at your place of work, then your deductions will be reduced or eliminated based on your income and filing status.
A phase-out range starts at $77,000 and ends at $87,000, with no deduction allowed for filers with a modified adjusted gross income (MAGI) greater than this. The Roth IRA maximum contribution does have income limitations of $146,000 MAGI for single filers and $230,000 MAGI for those filing jointly.
| Company | Best For | Fees | Account Minimum |
|---|---|---|---|
| Fidelity Investments | Full-Service Brokerage Features | $0 for stock/ETF trades, $0 plus $0.65/contract for options trades | $0 |
| Wealthfront | Hands-Off Approach to Investing | 0.25% for most accounts; no trading commission or fees for withdrawals, minimums, or transfers | $500 |
| Interactive Brokers | Wide Range of Global Assets | $0.00 commissions for equities/ETFs available on IBKR’s TWS Lite, or low costs scaled by volume for active traders who want access to advanced functionality such as order routing; $0.65 per contract for options on TWS Lite and TWS Pro, with scaled rates based on volume; $0.85 per contract for futures | $0 |
Self-Employed Retirement Plans
There are several types of retirement plans specifically designed for self-employed individuals and/or small business owners. You can use these accounts if you have your own business, even if you also have full-time employment with access to a retirement account.
- SEP IRA: A simplified employee pension (SEP) IRA allows business owners to contribute up to 25% of their pay to a pretax retirement account. However, if you contribute to your own account and have employees, you must also contribute the same percentage to their plans.
- Solo 401(k): Officially known as a one-participant 401(k), this plan works similarly to any other 401(k). You can only use it if you have no employees other than you or your spouse, but you can contribute up to$23,000 in 2024 in elective deferrals and up to 25% of compensation of employer non-elective contributions.
2. Take Advantage of Employer-Sponsored Retirement Accounts
Several factors make employer-sponsored retirement accounts such an attractive option for retirement savings.
First, employer-sponsored retirement accounts have far higher contribution limits than an IRA that you could open on your own. In 2024, you can contribute up to $23,000 to your 401(k) but only $7,000 to your IRA. These higher limits can help you reach your retirement goals more quickly. Contributing up to the maximum can be part of a plan to help you achieve early retirement or a more luxurious lifestyle in retirement.
Another common perk of employer-sponsored accounts is that they may come with matching contributions from your employer. Many companies will match an employee’s contribution up to a certain percentage of their salary. For example, a company might match your 401(k) contributions at a rate of 50% up to 6% of your pay or at a rate of 100% up to 3% of your salary.
“If your employer offers a 401(k) match, take it—otherwise, you’re leaving free money on the table,” Steve Sexton, CEO of Sexton Advisory Group in Temecula, California, told Investopedia. “Your employer match can give you a leg up on your retirement savings plan and bring you closer to your financial goals faster.”
Note
Some companies also offer non-matching contributions. In other words, your employer may contribute a certain percentage of your salary to your 401(k) or a similar plan, regardless of whether you’ve made a contribution.
3. Automate Your Retirement Contributions
Automating your retirement contributions is the simplest way to ensure you reach your investment goals each month. Automation has a few distinct benefits.
First, automating your retirement contributions ensures they will happen consistently. Without automating your savings, it’s easy to delay contributing and use the money for other purposes. When your contributions are automated, you don’t need to take any more action.
“It allows you to ‘set it and forget it,’ minimizing the amount of tasks around your financial responsibilities every month,” Sexton said.
Automation also makes it easy to plan your annual contributions ahead of time. Let’s say you know you want to max out your 401(k) contributions for the year. You could set up automatic contributions of $1,917 per month and know that by the end of the year, you’ll have contributed a maximum of $23,000.
4. Create an Emergency Fund
Having a well-funded emergency fund can directly affect your ability to reach your retirement goals.
“It is important to realize that unexpected expenses will occur throughout your life, including retirement,” Sexton said.
First, your emergency fund helps you avoid disruptions to your finances that could derail your retirement savings efforts. You can use your emergency fund to cover an unexpected expense like a medical bill or car repair rather than divert money that would have otherwise gone into your retirement account.
An emergency fund can also help you avoid having to withdraw money from your retirement account, either as an early withdrawal or a loan. Retirement withdrawals and loans have some financial consequences, including taxes, penalties, and/or interest. And, of course, money that is no longer invested will no longer grow.
“Not only can [an emergency fund] lessen the financial blow of an unexpected life event—like a medical diagnosis or an accident—it can also prevent you from accumulating debt in your golden years,” Sexton said.
Many financial experts recommend setting aside three to six months’ worth of expenses. Sexton recommends checking in with it twice per year to ensure it’s updated for lifestyle adjustments and inflation.
Compare Roth IRA Accounts
| Company | Best For | Fees | Account Minimum |
|---|---|---|---|
| Charles Schwab | Investor Education | $0 for stock/ETF trades, $0.65 per contract for options | $0 |
| Betterment | Automated Investing With Access to Human Advice | 0.25% (annual) for investing plan accounts with at least $20,000 or at least $250 per month in recurring account deposits; otherwise, the fee is $4/month 0.65% (annual) fee on accounts with at least $100,000 in assets for Betterment Premium account holders with unlimited access to certified financial planners; for accounts with at least $2 million, there is a fee discount of 0.10% 1% (annual) plus trading expenses for crypto accounts No management fees for Betterment Checking or Cash Reserve | $0; $10 minimum to start investing; rypto minimum $50; $50 minimum for rebalancing |
| Vanguard | Access to Low-Cost Mutual Funds | $0 for stock/ETF trades; $0 plus $1 per contract for options | $0 |
5. Use the Power of Compounding
Investing early and often is about both the amount of money you’ll be able to contribute to your retirement accounts and how much that money can earn. When you start saving for retirement earlier, you can take advantage of the power of compounding.
Compounding is when the money you’ve invested earns money, and then the money you’ve earned also begins to earn money. Here’s an example of how compounding works.
Let’s say you contribute $500 per month starting at age 25 until you retire at age 65. If you put that money into a bank account that doesn’t earn interest, you would save $240,000 in your 40 years of saving. But what if you had invested that money instead?
Let’s say you put that same $500 per month into a retirement account that earned an average annual return of 8%. At the end of the 40 years, you would have amassed savings of more than $1.5 million.
Compounding can benefit you anytime during your working life, but starting to save in your 20s and 30s will give you an advantage over saving later, as your money has more time to grow and compound than it does if you wait until your 40s or 50s to start investing.
Frequently Asked Questions (FAQs)
Is it Better to Start Saving for Retirement at 25 or 35?
The earlier you can start saving for retirement, the better. If you can set aside money when you are 25 years old, you can use the power of compounding for an extra 10 years compared to if you started saving at age 35.
Is 35 Too Late to Start a Roth IRA?
You can open a Roth IRA at any age and begin contributing to it. It is not too late to start a Roth IRA at age 35. Your contributions will be made with after-tax dollars, and then you can withdraw your money—including any gains you made—in your retirement years.
How Much Should a 25-Year-Old Have in Retirement?
How much you should have saved for retirement at any given age depends on your financial goals and current financial situation. Some experts recommend setting aside at least 15% of your income each year.
The Bottom Line
If you’re a 25- to 34-year-old saving for retirement, you have a good start to building your nest egg. Now that you’ve taken that important step of saving, you can use a few strategies like automating your investments, building an emergency fund, and taking advantage of your employee perks to stay on track to reach your retirement goals.
