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When we talk about personal finance, numerical guidelines traditionally tend to shape our money habits.
We often hear about having three to six month's worth of living expenses in an emergency fund, or abiding by the 50/30/20 budget rule (spending 50% of our take-home pay on needs, 30% on wants and 20% on debt repayment and savings).
How much cash you stow away for retirement is no different. In fact, most financial experts will suggest investing 15% of your income annually in a retirement account (including any employer contribution).
With 401(k)s, or employer-sponsored retirement plans, you may find that your company offers a match if you contribute a certain amount. For example, if your company matches up to 6% of your salary and you contribute 6%, you're doubling what you're able to put away.
While the more you can contribute the better, Shannon Lynch, a CFP at Empower (formerly Personal Capital), says that it's generally a good rule of thumb to contribute at least enough to get your full employer match if you have one. A company match is additional money from your employer that's put into your 401(k), so you want to do everything you can to take advantage of that. Otherwise, that's 'free' money you're leaving on the table.
If you aren't yet in a position to contribute enough to meet your employer's match, and thus not enough to reach the desired 15% savings rate, aim to boost your retirement contributions by 1% to 2% each year. If you opt in to do so, some companies will automatically raise your contribution rate annually, so it's worth making sure you are signed up for what is called an "auto-escalation" feature.
Ivory Johnson, a CFP and founder of Delancey Wealth Management, recommends increasing your contribution rate as you get pay raises until you max out the limit. There is a limit to how much you can contribute annually to your 401(k). In 2021, the standard annual contribution limit is $19,500 for 401(k) plans. And those over age 50 can use catch-up contributions to add an extra $6,500 in their 401(k) account. Employer contributions don't count towards those specific limits.
Lynch reminds retirement savers to be strategic with the magic number they would like to contribute to their 401(k) before automatically trying to max it out, however.
"Situations can arise where you may need to prioritize your cash savings in your emergency fund or save for a different reason, such as for a down payment on property or a vehicle," she adds. "$19,500 isn't a small chunk of change."
Keep in mind that although you don't pay income taxes on the money you set aside in a 401(k), you'll have to pay taxes later on when you eventually withdraw the funds in your nonworking years.
Don't worry if your employer doesn't offer a 401(k); there are still ways you can save for retirement on your own.
Many big banks and brokerages offer Individual Retirement Accounts, or IRAs, that allow you to put your retirement money into a range of investments, such as individual stocks, bonds, index funds, mutual funds and CDs. Just like with a 401(k), you can set up automatic contributions into your IRA from a checking or savings account.
When shopping around for an IRA, choose an account that has no minimum deposits, offers commission-free trading and provides a variety of investment options. Taking these factors into account, Select narrowed down our favorites for every type of retirement saver. (See our methodology for more information on how we choose the best traditional IRAs.)
- Best overall: Charles Schwab IRA
- Best for beginner investors: Fidelity Investments IRA
- Best for experienced investors: Vanguard IRA
- Best for hands-off investors: Betterment IRA
- Best for hands-on investors: E*TRADE IRA
In 2021, the standard annual contribution limit is $6,000 for IRAs. Those over age 50 can use catch-up contributions to add an extra $1,000 in their IRA. Similar to a 401(k), a traditional IRA can reduce your taxable income, meaning you owe the government a bit less every year you contribute.
If you're a younger investor, or planning to have more income and a higher tax rate when you retire, consider a Roth IRA over a traditional IRA. With Roth IRAs, you pay taxes upfront by contributing after-tax dollars and later in retirement your withdrawals are tax-free (as long as your account has been open for at least five years).
To determine which individual retirement accounts (IRAs) are the best for investors, Select analyzed and compared traditional IRAs offered by national banks, investment firms, online brokers and robo-advisors. We narrowed down our ranking by only considering those that offer commission-free trading of stocks and ETFs, as well as a variety of investment options so you can best maximize your retirement savings.
We also compared each IRA on the following features:
- $0 minimum deposit: Most of the IRAs on our ranking don't have minimum deposit requirements.
- Low fees: We considered each IRA's fees, commission trading fees and transaction fees.
- Bonus offered: Some IRA offer promotions for new account users.
- Variety of investment options: The more diversified your portfolio, the better. We made sure our top picks offered a variety of investments such as stocks, bonds, mutual finds, CDs and ETFs. Most also offer options trading.
- A hub of educational resources: We opted for IRA with an online resource hub or advice center to help you educate yourself about retirement accounts and investing.
- Ease-of-use: Whether accessing your IRA via your laptop at home or on your smartphone while on the go, it's important to have an easy user experience. We noted when investment platform excelled in usability.
- Customer support: Every IRA on our list provides customer service available via telephone, email or secure online messaging.
After reviewing the above features, we sorted our recommendations by what type of investor is a best fit, from beginners and hands-off investors, to the more experienced and hands-on investors.
Your earnings in an IRA depend on any associated fees, the contributions you make to your account and the fluctuations of the market.