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 percentage of my income should I put in an IRA? ›
But how much is enough? 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.
How much should I contribute to my IRA per paycheck? ›
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.
How much should you have in your IRA by 26? ›
At ages 18 to 25, you should have saved 0.2 times your current salary. At ages 26 to 30, you should have saved 0.9 times your current salary. At ages 31 to 35, you should have saved 1.6 times your current salary.
How much money should a 25 year old have saved? ›
Having an emergency fund of 3-6 months of living expenses by age 25 can help provide financial stability and helps you weather unexpected expenses. Starting retirement savings early, even small amounts, allows compound interest to work its magic.
What percentage should I contribute to my 401k at age 25? ›
Most financial planning studies suggest that the ideal contribution percentage to save for retirement is between 15% and 20% of gross income.
Can I contribute 100% of my salary to an IRA? ›
Annual IRA Contribution Limit
Eligible individuals age 50 or older, within a particular tax year, can make an additional catch-up contribution of $1,000. The total contribution to all of your Traditional and Roth IRAs cannot be more than the annual maximum for your age or 100% of earned income, whichever is less.
Is it smart to put money in an IRA right now? ›
So if you have enough money right now to max out your IRA — or even just a good chunk of change you could put in — put in that big contribution as soon as you can. The research supports investing the whole amount at once, up front, to take max advantage of all the time you have.
How much will an IRA reduce my taxes? ›
Reduce Your 2023 Tax Bill
For example, a worker who pays a 24% tax rate and contributes $6,500 to an IRA will pay $1,560 less in federal income tax. Taxes won't be due on that money until it is withdrawn from the account. The last day to contribute to an IRA for 2023 is the tax filing deadline in April 2024.
What percentage of my paycheck should I save? ›
At least 20% of your income should go towards savings. Meanwhile, another 50% (maximum) should go toward necessities, while 30% goes toward discretionary items. This is called the 50/30/20 rule of thumb, and it provides a quick and easy way for you to budget your money.
If you are in your 20s and ready to open an individual retirement account (IRA) to save for retirement, you'll have two basic types to choose from: traditional or Roth. Which would be right for you? In most cases, the answer will be a Roth.
Is 30 too old to start an IRA? ›
Even when you're close to retirement or already in retirement, opening this special retirement savings vehicle can still make sense under some circ*mstances. 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.
Where should I be financially at 25? ›
By age 25, you should ideally have enough money to cover three months of essential bills. You should also have between one-third and half of a year's salary in a retirement plan. If you're nowhere close, you may want to turn to the gig economy for an income boost.
What is a good net worth at 25? ›
The Ideal Number
| Age | Income | Net Worth |
|---|
| 20 | $25,000 | $50,000 |
| 25 | $35,000 | $87,500 |
| 30 | $50,000 | $150,000 |
| 50 | $55,000 | $275,000 |
1 more rowHere's how many Americans have more than $100,000 saved for retirement (by age): Age 18-24: 2.1% Age 25-34: 4% Age 35-44: 11.5%
How much should I contribute to my IRA to reduce my taxes? ›
For 2023, you can contribute to a traditional IRA up to: $6,500 if you are under the age of 50. $7,500 if you are age 50 or older by the end of the tax year.
What is the 50 30 20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
What is the 4 percent rule for IRAS? ›
The 4% rule entails withdrawing up to 4% of your retirement in the first year, and subsequently withdrawing based on inflation. Some risks of the 4% rule include whims of the market, life expectancy, and changing tax rates. The rule may not hold up today, and other withdrawal strategies may work better for your needs.
Should high income contribute to IRA? ›
Typically, high-income earners cannot open or contribute to a Roth IRA because there's an income restriction. For 2024, if you earn $161,000 or more as an individual or $240,000 or more as a couple, you cannot contribute to a Roth IRA. But there's a way around the rule book—and it's perfectly legal.
