The Best IRA for a 20-Something Investor (2024)

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. Here’s why.

Key Takeaways

  • A Roth individual retirement account (IRA), rather than a traditional IRA, may make the most sense for people in their 20s.
  • Withdrawals from a Roth IRA can be tax-free in retirement, which is not the case with a traditional IRA.
  • Contributions to a Roth IRA are not tax deductible, as they are for a traditional IRA.
  • Younger savers tend to be in lower tax brackets, which means that they benefit less from tax-deductible contributions to a traditional IRA than those in higher brackets.

Roth vs. Traditional IRAs

A traditional IRA provides a tax deduction for your contributions and a tax deferral on any gains in the account until you withdraw the money. Once you begin making withdrawals, they will be taxed based on your tax bracket at the time.

Roth IRA contributions, on the other hand, are not tax deductible, but your withdrawals can be tax-free if you follow the rules.

Younger investors who are just starting out in their careers tend to be in lower tax brackets and don’t benefit as much from the tax deductions for contributions to a traditional IRA as older investors in higher brackets may. In addition, the younger you are, the more time that your account will have to grow and compound—and with a Roth, all of that money can be tax-free someday.

Here’s a closer look at how each type of IRA works and why a Roth is usually a wiser choice for 20-somethings, especially if they can afford to forgo an immediate tax deduction.

Traditional IRA Tax Benefits

Traditional IRAs have been around since the 1970s and were once the only choice that people had. While their tax benefits provided an attractive incentive for Americans to save for retirement, the government wanted its cut eventually.

As a result, traditional IRAs can trigger a big tax bill when account holders begin to withdraw their money. The government also made withdrawals mandatory after a certain age, currently 73 if you were born between 1951 and 1959 and 75 if you were born in 1960 or after. Those are known as required minimum distributions (RMDs).

Here is a somewhat simplified example of how a traditional IRA can grow in value, while also accumulating a substantial tax obligation:

Suppose you’re 23 years old, currently earn $50,000 annually, and contribute the maximum allowed of $6,500 for 2023 to a traditional IRA. Because you are in the 22% tax bracket, your tax deduction for your IRA contribution will save you approximately $1,430 in federal income tax.

A Roth IRA allows you to withdraw your contributions (but not investment gains) free of taxes or early-withdrawal penalties before age 59½, which is not the case with a traditional IRA.

Now suppose you continue to contribute $6,500 each year to your traditional IRA until you are 63 years old (40 years multiplied by $6,500 = $260,000), and your traditional IRA grows to $1.8 million by that time (this is possible at an 8% annual return). If all of your contributions were fully deductible, then you saved $57,200 in taxes over the 40 years, assuming (for the sake of simplicity) that you remained in the 22% tax bracket.

At age 63, you decide to retire and withdraw $50,000 a year from your traditional IRA for living expenses. If you are still in that 22% tax bracket, you will owe $11,000 in federal income tax on each $50,000 withdrawal every year thereafter. In other words, you’ll net just $39,000.

If you’re in a higher tax bracket when you begin making withdrawals—either because you have more income or because tax rates have gone up overall—you could owe more still. And remember, once you hit age 75, you’ll have no choice but to start taking withdrawals and paying taxes on them.

Roth IRA Tax Benefits

The Roth IRA, introduced in 1997, works differently. Suppose that you contribute the same $6,500 a year for 40 years to a Roth IRA. You don’t get any tax deduction, but the Roth IRA still grows to $1.8 million—assuming the same 8% annual return. At age 63, you start to withdraw $50,000 per year.

The difference now is that there is no tax due on the Roth withdrawal because distributions from a Roth are tax-free as long as you have had a Roth account for at least five years and reached age 59½. In this scenario, you can withdraw $50,000 (or as much as you want) and keep the full amount.

Another key difference between Roth and traditional IRAs is that Roths are never subject to RMDs during the original owner’s lifetime. So if you don’t need the money, you can simply pass it along to your heirs when you die. They’ll have to withdraw it eventually, but their withdrawals can also be tax-free.

How Much Can You Contribute to a Roth Individual Retirement Account (IRA)?

For tax year 2023, the maximum amount that you can contribute to a Roth or a traditional individual retirement account (IRA)—or the two accounts combined—is $6,500 for anyone under age 50 or $7,500 for anyone age 50 or older. For 2024, this limit is $7,000 and $8,000 respectively, to account for inflation.

Who Is Eligible to Contribute to a Roth IRA?

To contribute to a Roth IRA, you first must have earned income from a job or self-employment that is at least as much as you plan to contribute. There are also income limits on your eligibility for contributing. For example, for tax year 2023, a single taxpayer is eligible to make a full Roth IRA contribution if their modified adjusted gross income (MAGI) is under $138,000. In the $138,000 to $153,000 range, they are eligible for a partial contribution. Above $153,000, they are ineligible. For 2024, the income phase-out range is between $146,000 and $161,000.

Are Roth 401(k) Plans a Good Idea for Young Investors?

A designated Roth 401(k), if your employer offers one, has the same advantages as a Roth IRA. It also has considerably higher contribution limits, allowing you to save even more for tax-free income after you retire. One key difference, however, is that a Roth 401(k)—unlike a Roth IRA—is subject to required minimum distributions (RMDs). This means that the RMD money can no longer continue to grow tax-free in your account.

The Bottom Line

Because of the Roth IRA’s unique tax benefits, 20-somethings who are eligible should seriously consider contributing to one. A Roth IRA can be a wiser long-term choice than a traditional IRA, even though contributions to traditional IRAs are tax deductible.

Advisor Insight

Stephen Rischall, CFP, CRPC
Navalign Wealth Partners, Encino, CA

In general, Roth contributions have an edge over traditional contributions for young people. Having tax-free distributions in retirement is great, especially if taxes go up in the future. Since younger investors have a longer time horizon, the impact of compounding growth benefits even more.

Most young people tend to be in lower tax brackets. The benefit of deferring taxes by making contributions to a traditional IRA may not have as much of a tax savings impact as it will in the future when you are earning more.

There are income limits that disqualify you from making Roth IRA contributions. One day, if your income surpasses that limit, you can’t add to it.

Ultimately, you should seek a balance of making both Roth and traditional contributions over your lifetime.

The Best IRA for a 20-Something Investor (2024)


What type of IRA is best for a 20 year old? ›

A Roth individual retirement account (IRA), rather than a traditional IRA, may make the most sense for people in their 20s. Withdrawals from a Roth IRA can be tax-free in retirement, which is not the case with a traditional IRA. Contributions to a Roth IRA are not tax deductible, as they are for a traditional IRA.

What is the best IRA to invest in? ›

Summary: Best IRA Accounts & Their Ratings
CompanyForbes Advisor RatingView More
TD Ameritrade4.3Learn More Read Our Full Review
Charles Schwab4.3View More
Betterment4.8Learn More On Betterment's Secure Website
Vanguard Digital Advisor4.8Learn More On Vanguard's Website
2 more rows
Apr 1, 2024

Should I start a Roth IRA in my 20s? ›

Although the best time to open a Roth IRA is when you are young and have the magic of compounding and interest on your side, it can also be a useful vehicle when you are older and would like to fund an account that is not subject to required minimum distribution rules during the life of the participant.

How much can an IRA make 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.

What age is too late for IRA? ›

As mentioned above, there are also age limits for each of these accounts: Traditional IRAs: Although previous laws stopped traditional IRA contributions at age 70.5, you can now contribute at any age. However, required minimum distribution (RMD) rules still apply at 73 in 2023 and 2024, depending on when you were born.

Which IRA has the best rate of return? ›

Best IRA CD Rates Of April 2024
CompanyForbes Advisor RatingCD APY
Discover® Roth/Traditional IRA Certificates of Deposit4.52.00% to 4.70%
NASA Federal Credit Union IRA Certificate of Deposit4.54.00% to 5.40%
Bethpage Federal Credit Union IRA Certificate of Deposit4.52.25% to 5.00%
2 more rows
Apr 16, 2024

Where is the safest place to put an IRA? ›

The safest place to put your retirement funds is in low-risk investments and savings options with guaranteed growth. Low-risk investments and savings options include fixed annuities, savings accounts, CDs, treasury securities, and money market accounts. Of these, fixed annuities usually provide the best interest rates.

What is the least risky IRA? ›

A broad-based U.S. bond or fixed-income fund is generally less risky than an equity fund. However, bond funds don't provide the same growth potential, which means generally lower returns.

What is the best IRA to avoid taxes? ›

Consider a Roth IRA

In general, if you think you'll be in a higher tax bracket when you retire, a Roth IRA may be the better choice. You'll pay taxes now, at a lower rate, and withdraw funds tax-free in retirement when you're in a higher tax bracket.

How to build wealth in your 20s? ›

How to Build Wealth in Your 20s
  1. Steer clear of debt. If you have debt, use the debt snowball to knock it out of your life as fast as you can—student loans included. ...
  2. Live below your means. ...
  3. Raise your standard of living slowly. ...
  4. Budget like your future depends on it—because it does. ...
  5. Start early.
Jan 23, 2024

How much will a Roth IRA grow in 10 years? ›

Let's say you open a Roth IRA and contribute the maximum amount each year. If the base contribution limit remains at $7,000 per year, you'd amass over $100,000 (assuming a 8.77% annual growth rate) after 10 years. After 30 years, you would accumulate over $900,000.

How can I grow my money in my 20s? ›

Start saving and investing in your 20s by contributing to a retirement plan, investing in index funds and ETFs, automating your investment management with a robo-advisor and increasing your savings rate over time.

Should I open an IRA at 20? ›

However, there are tremendous advantages to making Roth IRA contributions a priority at a young age. First of all, the small amounts saved when people are in their twenties have time to grow and take advantage of compounding. Compounding is when earnings and interest earned on a deposit accumulate and are reinvested.

How long does it take to become a millionaire with an IRA? ›

Rely on the math

Still, the math behind becoming a Roth IRA millionaire still holds. Assuming an annual January contribution to your Roth IRA of $6,500 and an 8% average long-term investment return, you can expect to become an IRA millionaire in just under 34 years.

How quickly can an IRA grow? ›

Historically, with a properly diversified portfolio, an investor can expect anywhere between 7% to 10% average annual returns. Time horizon, risk tolerance, and the overall mix are all important factors to consider when trying to project growth.

What is the best IRA account for a minor? ›

In general, the Roth IRA is the IRA of choice for minors who have limited income now. By the same logic, it's often recommended for adults who expect to be in a higher tax bracket in the future. "If a child keeps [a Roth] until age 59½ (under today's rules), any withdrawal will be tax-free.

Is it better to have Roth or traditional IRA? ›

In general, if you think you'll be in a higher tax bracket when you retire, a Roth IRA may be the better choice. You'll pay taxes now, at a lower rate, and withdraw funds tax-free in retirement when you're in a higher tax bracket.

Should I put my money in a Roth IRA or traditional IRA? ›

The bottom line

If you expect tax rates in the future will rise, either because your wealth and income will be higher when you retire or a change in tax law, consider Roth accounts. Also, be sure to talk with your CPA or tax professional about whether a traditional or a Roth IRA—or both—makes sense for you.

Which is better IRA or Roth IRA? ›

To come out even in terms of after-tax savings, you have to be disciplined enough to invest the traditional IRA tax savings you get every year back into your retirement savings. If that seems unlikely to happen, then you'd be better off saving in a Roth, where you'll arrive at retirement with more after-tax savings.

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