There are certain benefits to being in your 20s. You may have more energy to maintain a social calendar and put in long hours at the office that make it possible to advance your career. And you may not have children, thereby allowing you to use more of your earnings to work toward different financial goals.
One of those goals should be saving money for retirement. A good plan to use for that purpose is an IRA, since you get different tax benefits that a regular brokerage account won't give you.
But at age 25, retirement is a long way off. So you may be wondering how much of your salary you should be aiming to save in your IRA. And the answer is, as much as the IRS will allow you to, if that's something you can swing.
It pays to max out an IRA at a young age
Each year, the IRS sets a limit for allowable IRA contributions. In 2024, the limit is $7,000 if you're under the age of 50. If you're 50 or older, the limit is $8,000.
The reason the IRS limits contributions is that IRAs are tax-advantaged. With a traditional IRA, every dollar you put in could be a dollar of income the IRS won't tax you on. So the agency isn't going to let contributions be a free-for-all, because it wants its tax revenue. However, the reason those tax breaks exist in an IRA is to incentivize workers to save money for retirement, and also, to make it easier to swing those contributions.
Now, if you're 25, retirement might be the last thing on your mind. It might also be a good four decades away. But that's actually why it's so important to save as much as you can for retirement when you're so young.
The money in your IRA doesn't just sit in cash -- or at least it shouldn't. Rather, you should invest it so it grows significantly over time.
The more time you give your contributions to grow, the larger a balance you stand to retire with. So if you're able to max out your IRA contribution at age 25, it could result in a lot of money down the line.
The results might surprise you
Let's say you max out your IRA in 2024 at $7,000 when you're 25 years old. Let's also assume you invest your IRA in S&P 500 stocks that generate an average annual 10% return, which is consistent with the S&P 500's performance over the past 50 years. If you leave that $7,000 to grow for 40 years, you might turn it into about $317,000. And that's just from a single year of making IRA contributions.
That's why your goal should be to max out your IRA at age 25, regardless of the percentage of your salary that amounts to. Of course, if you're only earning $25,000 a year, then contributing $7,000 to your IRA is probably not doable.
But can you swing a $7,000 contribution on $60,000 a year? Maybe. That's less than 12% of your income. And it may be feasible if you're willing to spend more modestly on other bills, like housing.
All told, maxing out an IRA any age requires some sacrifice. But if you make that effort when you're young, you may be surprised -- in a good way -- at your results.
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FAQs
If you're 25, you should aim to max out your IRA every year. For 2024, a 25-year-old can contribute up to $7,000 to an IRA. It might seem unnecessary to save for retirement at such a young age, but giving your money time to grow is one of the best things you can do for your future self.
What percent of paycheck should go to IRA? ›
Our guideline: Aim to save at least 15% of your pre-tax income1 each year, which includes any employer match. That's assuming you save for retirement from age 25 to age 67. Together with other steps, that should help ensure you have enough income to maintain your current lifestyle in retirement.
What kind of IRA should a 25 year old have? ›
A general guideline is that if you think your tax bracket will be higher when you retire than it is today, you may want to consider a Roth IRA—especially if you're younger and have yet to reach your peak earning years.
Where should I be financially at 25? ›
“Ideally, your savings should reach $20,000 by the time you turn 25,” says Bill Ryze, a certified Chartered Financial Consultant (ChFC) and board advisor at Fiona. The national average for Americans between 25 and 30 years of age is $20,540.
Is 25 too late to start Roth IRA? ›
There is no age limit to open a Roth IRA, but there are income and contribution limits that investors should be aware of before funding one.
What happens when you contribute $5000 to an IRA at 25? ›
If you were to put $5,000 into your IRA at age 25 and leave that money alone until age 65 (which is a common age to retire at), over that 40-year period, your balance would grow to about $226,000, assuming a 10% average annual return. Now you may want to save more than that for retirement.
How much 401k should I have at 25? ›
Ages 25-34
By age 30, Fidelity recommends having the equivalent of one year's salary stashed in your workplace retirement plan. So, if you make $50,000, your 401(k) balance should be $50,000 by the time you hit 30.
What income is too high for IRA? ›
The income limits on Roth contributions increased for 2024, which means savers with income at or below $161,000 ($240,000 for married couples filing jointly) can contribute to a Roth IRA.
What is a good amount to put into IRA? ›
It can be a challenge to determine how much to save in your IRA. As a general guideline, Fidelity recommends working up to saving 15% of your pre-tax income each year (including any employer contributions) for retirement. That includes savings in any other retirement accounts or savings plans, like 401(k)s or 403(b)s.
How much should you have in your IRA by 26? ›
Someone between the ages of 18 and 25 should have 0.1 times their current salary saved for retirement. Someone between the ages of 26 and 30 should have 0.5 times their current salary saved for retirement. Someone between the ages of 31 and 35 should have 1.1 times their current salary saved for retirement.
The main difference between a Roth IRA and a traditional IRA is how and when you get a tax break. Contributions to traditional IRAs are tax-deductible, but withdrawals in retirement are taxable as income. In comparison, contributions to Roth IRAs are not tax-deductible, but the withdrawals in retirement are tax-free.
How to start saving at 25? ›
Plan For Retirement, Especially In Your 20s
- Just start. ...
- Set up automatic payments to your retirement account. ...
- Ask about an employer match. ...
- Save more as you make more. ...
- Defer taxes to make larger contributions now. ...
- Get advice from an expert you trust. ...
- Make sure you can sleep at night. ...
- Understand there's risk to being 'safe,' too.
Average Salary for Ages 25-34
For Americans ages 25 to 34, the median salary is $1,040 per week or $54,080 per year. That's a big jump from the median salary for 20- to 24-year-olds. As a general rule, earnings tend to rise in your 20s and 30s as you start to climb up the ladder.
What percentage of 25 year olds make $100,000? ›
From age 18-24, only 1% of earners (7% altogether) earn $100k per year or more. This makes these age groups by far the lowest earners in the US. Americans make the most income gains between 25 and 35. Only 2% of 25-year-olds make over $100k per year, but this jumps to a considerable 12% by 35.
Is 30k in savings good at 25? ›
By the time you're 25, you probably have accrued at least a few years in the workforce, so you may be starting to think seriously about saving money. But saving might still be a challenge if you're earning an entry-level salary or you have significant student loan debt. By age 25, you should have saved about $20,000.
How much should a 25 year old put away for retirement? ›
Someone between the ages of 18 and 25 should have 0.1 times their current salary saved for retirement. Someone between the ages of 26 and 30 should have 0.5 times their current salary saved for retirement. Someone between the ages of 31 and 35 should have 1.1 times their current salary saved for retirement.
What percentage should a 25 year old put in 401k? ›
The amount of money you should contribute to your 401(k) each year depends on your specific financial situation and goals. Ideally, you should contribute at least 10% to 15% of your pay towards retirement accounts, including what your employer contributes on your behalf, starting at age 25, Adams said.
How much will an IRA be worth in 20 years? ›
If you contribute 5,000 dollars per year to a Roth IRA and earn an average annual return of 10 percent, your account balance will be worth a figure in the region of 250,000 dollars after 20 years.
How much should I put in my IRA to start? ›
If you can afford to contribute around $500 a month without neglecting bills or yourself, go for it! Otherwise, you can set yourself up for success if you can set aside about 20 percent of your income for long-term saving and investment goals like retirement. Prioritize high-interest debt, but don't ignore other goals.
