How to save for retirement: The 5-minute guide to 401(k)s, IRAs, Roth accounts and more

A piggy bank at the beach next to a conch

You know that you should be saving for retirement, but it's hard to worry about something that's decades away — especially on an entry-level salary.

If you haven't started saving for retirement yet, you're not alone. More than 40% of millennials aren't saving for retirement, with nearly two-thirds of them saying that they're not making enough money to do so, according to a survey released this month by Wells Fargo. 

But this is a good example of when it pays to be different from the crowd.

"Compounding interest is your friend, so the earlier you start saving, the more money your money makes for you," says Carrie Jones, a certified financial planner with Life Planning Partners in Jacksonville, Florida.

A 25-year-old who saves $500 per month, for example, will have about $1 million by the time they reach age 65, assuming 6% annual returns (historical averages range from about 7% to 10%). Saving the same amount but waiting until age 35 to start would result in only about half that number, according to Jones' calculations.


You should aim to be saving 10% to 15% of your salary, Jones noted, but if you can't afford that much, don't get discouraged. Start at a lower rate and increase it each time you get a raise.

But where should you be saving?

Read on for the lowdown on the best places to to put your nest egg.

1. 401(k) accounts

You might already have one of these: Ask your boss or HR manager if you're not sure.

Assuming your employer does offer a 401(k) account, you should save at least enough to get any company match, which is essentially a 100% return on your money. So if you put in, say, 5% of your income, your company will put in the same amount — though most will match only up to a certain limit.

This year you can put up to $18,000 into a 401(k) account tax-free, and the money continues to grow tax-free until you make retirement withdrawals. One nice additional perk is that your contributions actually reduce your so-called "taxable income," which means — you guessed it — you'll pay less in 2016 taxes.

Within your account, you will see a menu of different options for funds (baskets of stocks and bonds) to invest in. When choosing, keep three terms in mind: "diverse," "age-appropriate" and "cheap."

Look for funds with lower-than-average expense ratios or fees; less than 0.5% is ideal. Then, read up a little on how to achieve portfolio diversification — meaning, essentially, an age-appropriate mix of bonds and stocks, large and small companies, domestic and international stocks, and more.

Or, if available, choose a low-cost target-date fund pegged to your approximate date of retirement, which will do the hard work for you.

2. IRA accounts

Instead of or in addition to a 401(k), you can open an "individual retirement account" on your own with most banks or brokers.

Don't just use Google to find one. Do a little homework first, by reading independent evaluations of how different providers stack up.

If you make less than $117,000 (or $184,000 for married couples filing jointly), you can put in up to $5,500; you won't pay taxes on the contributions or the growth until you start making retirement withdrawals.

You can mimic the ease of the automated payroll deductions you'd get with a 401(k) by setting up automatic payments into your IRA.

Contributing to an IRA can also help lower your tax bill.


3. Roth accounts

IRAs and 401(k)s actually come in two flavors: Traditional and Roth.

Unlike traditional 401(k)s and IRAs, you pay taxes on your Roth contributions upfront, but then your money grows tax-free — and you won't have to pay taxes on retirement withdrawals.

That's awesome for millennials, who might find themselves in a much higher tax bracket after a few decades.

"For a young person, if you have 40 years of growth, and you think that your taxes are going to increase over time, a Roth is a pretty good strategy," says Joe Ready, head of Wells Fargo Institutional Retirement and Trust.

Again, you'll want to do your homework before you pick where to open a Roth IRA.

Roth 401(k)s you'll have to get through work; luckily, an increasing number of employers are starting to offer them.

4. Self-employed accounts

Finally, if you're a freelancer or a small business owner — and want to save more than the IRA limits — you have several options.

Those include a SEP-IRA, an Individual 401(k), and SIMPLE IRA.

Each plan has its own rules and contribution limits, but, like the other accounts above, they all allow you to put away tax-free money and get tax-deferred growth on the earnings.