The Single Best Strategy to Save for Retirement in 2024

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Everybody needs to save for retirement. Whether you're doing this already or are about to start, you probably want to build your retirement savings as efficiently as possible. There's a smart strategy you can follow to help with this, but nearly half of Americans haven't tried it.

The best way to save for retirement is through retirement accounts. Even though these accounts are specifically designed for retirement savings, only 51% of Americans have them, according to an investing study by The Motley Fool. If you aren't using them yet, that's a change you should make in 2024.

Use retirement accounts to invest and save on taxes

Retirement accounts are the most effective strategy to save for retirement because they offer tax advantages. When you invest through a standard brokerage account, you don't get any tax benefits. You've already paid income taxes on the money you deposit to your account and invest. When you sell profitable investments, you'll owe capital gains taxes.

With a retirement account, you get to avoid some of this tax burden. The tradeoff is that they normally require that you don't start making withdrawals until age 59 1/2 or later. If you need to make a withdrawal before then, there's an early withdrawal penalty.

There are many types of retirement accounts, but here are the most common options:

• Individual retirement accounts (IRAs)
• Roth IRAs
• 401(k)s
• Roth 401(k)s

You can open an IRA and a Roth IRA yourself through a stock broker. A 401(k) is an employer-sponsored plan, so you can only open a 401(k) or a Roth 401(k) if your employer offers one. If you're self-employed, you also have the option of opening a solo 401(k) for yourself.

Here's how these retirement accounts help you save on taxes.

Traditional IRAs and 401(ks)

Traditional retirement accounts let you make tax-deferred investments. Contributions made to your IRA or 401(k) are tax deductible, and withdrawals are taxed as ordinary income.

IRAs and 401(k)s have annual contribution limits. Here are their limits for 2024:

• IRAs: $7,000 ($8,000 if you're 50 or older)
• 401(k)s: $23,000 ($30,500 if you're 50 or older)

If you're under 50, you can contribute up to $30,000 to an IRA and 401(k) this year. You could then deduct that $30,000 from your taxable income. If that portion of your income would've been taxed at 24%, you'd save $7,200 this way.

Roth IRAs and 401(k)s

Roth accounts offer tax-free growth and withdrawals. Your contributions aren't tax deductible, but you don't need to pay any taxes when you withdraw money.

While this doesn't save you money on your taxes right now, it's a huge advantage once you retire and start taking withdrawals. If you end up with $500,000 spread across Roth accounts, that's $500,000 you can use tax free.

The same contribution limits apply to Roth accounts, and these are combined limits. For example, if you open a traditional IRA and a Roth IRA, you can contribute up to $7,000 total in 2024. You could divide that down the middle and contribute $3,500 to each one, or any other split that doesn't total more than $7,000.

Note that Roth IRAs have income limits, so they're not an option for high earners. In 2024, if you're a single filer with a modified adjusted gross income (MAGI) of more than $146,000, the contribution limit is reduced. If your MAGI is over $161,000, you can't contribute to a Roth IRA at all.

How to set up your retirement accounts

To start using retirement accounts, first see which options you have available. If you work for an employer, check if it offers a 401(k) plan. If so, talk to the HR department to open one and start having contributions taken directly out of your paychecks.

An IRA is almost always an option -- anyone who has earned income can open this type of account. You can also open a Roth IRA, if you're under the income limits. And if you're self-employed, you're likely able to open a SEP IRA or solo 401(k).

If you're interested in an IRA, Roth IRA, or a self-employed retirement account, you can open those through an online stock broker. Here are some excellent IRA options:

• Best IRAs
• Best Roth IRAs

After you open a retirement account, you also need to choose your investments. The options vary depending on the type of account.

With IRAs, you can invest in anything that the stock broker offers. With 401(k)s, the options depend on the plan administrator. Most retirement accounts include target date funds, which are built around a specific retirement year. These are a good "set-it-and-forget-it" option. If you want to retire in 2050, you could choose a 2050 target date fund and invest in that going forward.

Retirement accounts are a powerful tool. Make sure to use them so you can lower your tax burden now, when you retire, or both of the above.

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