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? ›
Key Insights. Most investors should save at least 15% of their income for retirement. Your age, income, and current savings can help gauge how much you should save going forward. If you're off target, start recalibrating as soon as possible.
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.
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.
What percentage should I contribute to my 401k at age 25? ›
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 should a 30 year old have in IRA? ›
Fidelity's recommendations base savings on your income, rather than a fixed numerical goal: By age 30: Have the equivalent of your current annual salary saved. If you earn $50,000, you should have $50,000 saved for retirement at this age. By age 40: Have three times your annual salary saved.
Should I start an IRA at 25? ›
This chart shows that if you start saving earlier, you can have a higher balance at retirement than someone who saves more but starts later. If you contribute $10,000 a year from age 25 to age 40, for a total investment of $150,000, it could grow to $1,058,912 by the time you're age 65.
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.
Is 25 too old to start a 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.
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.
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.
How much will an IRA reduce my taxes? ›
The money deposited into a traditional IRA reduces your adjusted gross income (AGI) for that tax year on a dollar-for-dollar basis, assuming it is within the annual contribution limits (see below). So a qualifying contribution of, say, $2,000 could reduce your AGI by $2,000, giving you a tax break for that year.
How much should a 25 year old have saved? ›
By age 25, you should aim to have an emergency fund of 3-6 months of living expenses, and start regularly contributing to retirement savings to take advantage of compound interest over time, even if it's just small amounts.
How much should a 25 year old have saved for retirement? ›
By age 25, you should have saved about $20,000. Looking at data from the Bureau of Labor Statistics (BLS) for the fourth quarter of 2023, the median salaries for full-time workers were as follows: $712 per week, or $37,024 each year for workers ages 20 to 24.
How much should I have in a Roth IRA at 25? ›
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.
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? ›
Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
Should high income earners 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.
What is the 4 percent rule for IRAs? ›
The 4% rule limits annual withdrawals from your retirement accounts to 4% of the total balance in your first year of retirement. That means if you retire with $1 million saved, you'd take out $40,000. According to the rule, this amount is safe enough that you won't risk running out of money during a 30-year retirement.
