If you're lucky enough to work for a company that offers a 401(k) plan, take advantage. It's the easiest and best way to save for retirement. You get an immediate tax break, because contributions come out of your paycheck before taxes are withheld, thereby lowering your taxable income. You also get the possibility of a matching contribution from your employer. And you get tax-deferred growth -- meaning you don't pay taxes each year on capital gains, dividends and other distributions.
The federal limit on annual contributions is $18,000 for the 2015 tax year. Those 50 and older may contribute an additional amount, now set at $6,000, above the maximum allowable 401(k) contribution.
For all its tax advantages, the 401(k) is not a penalty-free ride. Pull out money from your account before age 59-1/2, and with few exceptions, you'll owe income taxes on the amount withdrawn plus an additional 10% penalty.
Also, be aware of your plan's vesting schedule -- the time you're required to be at the company before you're allowed to walk away with 100% of your employer matches. Of course, any money you contribute to a 401(k) is yours.
A Roth 401(k) is a relatively new option that some employers offer along with a traditional 401(k). It's basically the opposite of a traditional 401(k) plan -- meaning you pay the taxes on your contributions, but not your withdrawals. So while you do have to fund it with after-tax dollars, the money grows tax free and you won't have to pay income tax on any money you take out.
Roth 401(k)s are subject to required minimum distribution rules. So after you turn 70 ½, you will be required to start withdrawing money from the account.
If your employer offers both types of plans, you can divide your savings among them -- they will have the same investment options -- but your combined annual contributions cannot exceed $18,000 in 2015 ($24,000 for people 50 or older).
A 403(b) plan is a similar to a 401(k) plans but are offered to employees of government and tax-exempt groups, such as schools, hospitals and churches.
A 457 plan also works like a 401(k), but is available to state and local public employees, and employees of certain nonprofit organizations. Contribution limits are the same as for a 401(k), but if your employer offers both, you can contribute the maximum to both plans, essentially doubling the amount you can stash away. They may offer special catch-up contributions that are higher than those allowed under 401(k)s.
Thrift savings plans
The Thrift Savings Plan, or TSP, is like a 401(k) for employees of the federal government, including members of the uniformed services.