Table of Contents
- Why Start an IRA in Your 20s and 30s?
- Understanding the Types of IRAs
- IRA Comparison: Roth vs. Traditional for Young Adults
- 2025 IRA Contribution & Income Limits at a Glance
- Which IRA Is Right for You? [Interactive Quiz]
- Building a Strong Investment Strategy
- How to Open an IRA in 3 Simple Steps
- Considerations for Young Adults Looking to Start Investing
- FAQ
Saving for retirement may be lower on the priority list for young adults as they deal with the right-now reality of paying rent, bills, and student loans. But the truth is, it’s never too soon to start saving for the future. The more time your money has to grow, the better. And saving even small amounts now could make a big difference later.
An individual retirement account (IRA) allows you to save for the future over the long term. It’s one option that could help young adults start investing in their future.
There are different types of IRAs, and each has different requirements and benefits. Read on to learn about different types of IRAs, how much you can contribute, the possible tax advantages, and everything else you need to know about choosing the best IRA for young adults.
Key Points
• By saving and investing for retirement, a young adult could benefit from compounding returns, which can potentially help the growth of a nest egg over the long term.
• Traditional IRA contributions may help reduce current taxable income because they are made with pre-tax dollars, and withdrawals are taxed in retirement.
• Roth IRA contributions are made with after-tax dollars, and withdrawals in retirement are tax-free.
• A Roth IRA may be an option for young adults in a low tax bracket now who expect to be in a higher tax bracket in retirement.
• Automating contributions may potentially enhance the growth of retirement savings by making savings a recurring process.
Why Start an IRA in Your 20s and 30s?
When you begin saving and investing in your 20s and 30s, you have more time to build a nest egg. Starting an individual retirement account (IRA) early in adulthood may potentially help you benefit from compounding returns and also give you a tax-advantaged way to help your money grow.
The Power of Compounding Returns
The younger you are when you start investing, the more time you have to take advantage of the power of compounding, which can help your investment grow over time.
With compounding returns, if the money you invest earns a profit, and that profit is then reinvested, you earn money both on your original investment and on the returns. That means your gains could potentially multiply over time. The more time you have to invest, the more time your returns potentially have to compound.
Building a Tax-Advantaged Nest Egg Early
An IRA typically also has tax advantages that may help you build your savings more efficiently. For example, with a traditional IRA, you contribute pre-tax dollars and pay taxes on the distributions in retirement. With a Roth IRA, you contribute after-tax dollars, and your withdrawals in retirement are tax-free. One type of IRA or the other might make the most sense for an investor, or perhaps even a combination of both types.
Understanding the Types of IRAs
There are several types of IRAs, but two of the most common are traditional IRAs and Roth IRAs.
How much you can contribute to either type of IRA each year is determined by the IRS, and the amount generally changes yearly. In 2025, those under age 50 can contribute a maximum of $7,000 annually to a traditional or Roth IRA. (Those 50 and up can contribute an extra $1,000 per year in 2025 in what’s called a catch-up contribution.) An IRA calculator can help you figure out how much you can contribute, depending on the type of IRA you’re interested in, among other factors.
What Is a Roth IRA?
A key difference between Roth and traditional IRAs is how they’re taxed. With a Roth IRA, you contribute after-tax dollars. Your contributions are not tax deductible when you make them. However, your earnings grow tax-free in the account, and you withdraw your money tax-free in retirement.
What Is a Traditional IRA?
With a traditional IRA, you contribute pre-tax dollars. Generally speaking, you take deductions on your contributions upfront, which may lower your taxable income for the year, and then you pay taxes on the distributions when you take them in retirement. Your earnings in the account grow tax-deferred.
What Are SEP and Simple IRAs?
Individuals who are self-employed or own a small business might want to explore a SEP IRA or a SIMPLE IRA.
A SEP IRA is available for freelancers, independent contractors, and small business owners. Contributions are capped at a limit set by the IRS. In 2025, individuals can contribute up to the amount that’s the lesser of $70,000 or 25% of an individual’s compensation. Contributions to a SEP are made with pre-tax dollars and are tax deductible, and withdrawals are taxed in retirement.
A SIMPLE IRA is also an option for those who are self-employed as well as small businesses that have no other retirement savings plan. The tax and withdrawal rules for a SIMPLE IRA are the same as for a SEP IRA. One big difference between them: A SIMPLE IRA allows employees under age 50 to contribute up to $16,500 in 2025 (employers are required to contribute), while a SEP does not allow employee contributions, only employer contributions.
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IRA Comparison: Roth vs. Traditional for Young Adults
For those exploring a Roth vs. traditional IRA for a young person, there are a number of different factors to weigh, including taxes, withdrawal rules, and income.
Taxes
An important consideration when looking at which IRA is best for young adults is taxes. For individuals who currently earn a lower income and are in a lower tax bracket, the upfront tax deductions with a traditional IRA may not be as beneficial. A Roth, with its tax-free distributions in retirement, might be worth exploring instead — especially if the individual expects to be in a higher tax bracket in retirement.
Your income also determines how much of your contributions you can deduct with a traditional IRA. Deduction limits depend on your modified adjusted gross income (MAGI), whether you are single or married, your tax filing status, and if you’re covered by a retirement plan at work.
For instance, in 2025, those who are single and not covered by a retirement plan at work can deduct the entire amount they contribute to a traditional IRA. However, if they are covered by a retirement plan from their employer, they can only deduct the full amount if their MAGI is $79,000 or less. If they earn more than $79,000 and less than $89,000, they can take a partial deduction. And if their MAGI is $89,000 or more, they can’t take any deductions.
Individuals who are married filing jointly and aren’t covered by a retirement plan at work can deduct the full amount of their traditional IRA contributions. But in 2025, if their spouse is covered by a workplace retirement plan, they can deduct the full amount only if their combined MAGI is $236,000 or less. If their combined MAGI is $246,000 or more, they can’t take a deduction.
And if they themselves are covered by a retirement plan at work, they can deduct the full amount of their traditional IRA contributions only if their combined MAGI is $126,000 or less. If their combined MAGI is $146,000 or more, they can’t take a deduction.
Withdrawals
Another important consideration when choosing an IRA is withdrawals. Both traditional and Roth IRAs have early withdrawal penalties.
There are some differences, however. With a traditional IRA, individuals who take withdrawals before age 59 ½ will generally be subject to a 10% penalty, plus taxes. A Roth IRA typically offers more flexibility: Individuals may withdraw their contributions penalty-free at any time before age 59 ½. However, any earnings can typically only be withdrawn tax- and penalty-free once the individual reaches age 59 ½ and the account has been open for at least five years.
That said, there are exceptions to the IRA withdrawal rules, including:
• Death or disability of the individual who owns the account
• Qualified higher education expenses for the account owner, spouse, or a child or grandchild
• Up to $10,000 for first-time qualified homebuyers to help purchase a home
• Health insurance premiums paid while an individual is unemployed
• Unreimbursed medical expenses that are more than 7.5% of an individual’s adjusted gross income
The chart below gives a side-by-side comparison between a traditional and Roth IRA to help you quickly see what the key differences are.
Traditional IRA vs. Roth IRA: Key Differences
| Traditional IRA | Roth IRA | |
|---|---|---|
| Contributions | Made with pre-tax dollars | Made with after-tax dollars |
| Pay taxes on withdrawals in retirement | Yes | No |
| Potential earnings | Grow tax-deferred | Grow tax-free |
| Contributions tax deductible | Yes, if you meet income requirements | No |
| Early withdrawal penalty | May have to pay tax on earnings plus a 10% penalty before age 59 ½ | No taxes or penalties on contributions, but earnings are subject to taxes and a 10% penalty before age 59 ½ |
Who Should Choose a Roth IRA?
How a Roth IRA works is that your MAGI must be below a certain level to qualify. In 2025, single individuals who earn up to $150,000 can contribute the full amount to a Roth. Single filers with a MAGI of $150,000 or more but less than $165,000 can contribute a partial amount, and those who earn $165,000 or more are not eligible to open or contribute to a Roth. For married couples who file jointly, the limit in 2025 is up to $236,000 for a full contribution to a Roth, and between $236,000 to $246,000 for a partial contribution.
Since young adults starting out in their career might be earning less than they will in the future, it could make sense for a young adult to open a Roth now when they may not have to worry about earning too much to qualify. Plus for individuals earning less now and who expect to have a higher income in retirement, taking tax-free withdrawals after age 59 ½ could make financial sense as well.
A Roth IRA calculator can help you determine how much you can contribute annually.
Who Should Choose a Traditional IRA?
With a traditional IRA, you contribute pre-tax dollars. That means you take deductions on your contributions upfront, which may lower your taxable income for the year, and then pay taxes on the distributions when you take them in retirement. If you’re earning more now than you expect your income to be in retirement, a traditional IRA may make sense for your situation.
2025 IRA Contribution & Income Limits at a Glance
The charts below offer a handy comparison on the contribution limits of traditional and Roth IRAs, the income eligibility limits for Roth IRAs, and the traditional IRA tax deduction limits for 2025.
2025 IRA Annual Contribution Limits
| Age | Maximum Annual Contribution (2025) |
|---|---|
| Under age 50 | $7,000 |
| Age 50 and over | $8,000 (includes $1,000 “catch-up” contribution) |
2025 Roth IRA Income Eligibility Limits
| Tax Filing Status | Can Make Full Contribution | Can Make Partial Contribution | Cannot Contribute |
|---|---|---|---|
| Single / Head of Household | MAGI up to $150,000 | MAGI between $150,000 – $165,000 | MAGI of $165,000 or more |
| Married & Filing Jointly | MAGI up to $236,000 | MAGI between $236,000 – $246,000 | MAGI of $246,000 or more |
2025 Traditional IRA Deduction Limits (if Covered by a Workplace Plan)
| Tax Filing Status | Can Take Full Deduction | Can Take Partial Deduction | Cannot Take a Deduction |
|---|---|---|---|
| Single / Head of Household | MAGI up through $79,000 | MAGI between $79,000 – $89,000 | MAGI of $89,000 or more |
| Married Filing Jointly | MAGI up through $126,000 | MAGI between $126,000 – $146,000 | MAGI of $146,000 or more |
Which IRA Is Right for You? [Interactive Quiz]
Building a Strong Investment Strategy
As you explore a suitable IRA for young adults, you’ll want to make sure that you’re getting the most out of your investing strategy to help you achieve your financial goals. Here are some ways to do that.
Contributing to a 401(k) and an IRA.
If your employer offers a 401(k), enrolling in it and contributing as much as you can may help you get started. If possible, aim to contribute enough to get the matching contribution, which is, essentially, “free” or extra money that can help you build your savings.
If you don’t have a workplace 401(k) — and even if you do — you might consider opening an IRA as another account to help save for retirement. Contribute as much as you are able to. With an IRA, you typically have more investment options than you do with a 401(k), and you can also choose the type of IRA that could give you potential tax advantages.
Automating your contributions.
With a 401(k), your contributions usually happen automatically. Opening an investment account for an IRA could help you do something similar. Many brokerages allow you to set up automatic repeating deposits in an IRA. This way you don’t have to even think about contributing to your account — it just happens.
Understanding your risk tolerance.
When you’re deciding what assets to invest in, consider your risk tolerance. All investments come with some risk, but some types are riskier than others. In general, assets that potentially offer higher returns (like stocks) come with higher risk.
If a drop in the market is going to send your anxiety level skyrocketing, you may want to make your portfolio a little more conservative. If you’re willing to take risks, you might want to be a bit more aggressive. Either way, try to find an asset allocation that balances your tolerance for risk with the amount of risk you may need to take to help meet your investment goals.
You might even choose to do automated investing to help match your financial aims and risk tolerance.
Diversifying your investments.
Building a diversified portfolio across a range of asset classes — such as stocks, bonds, and cash, for instance — rather than concentrating all of it in one area — may help you offset some investment risk. Just be aware that diversification doesn’t eliminate risk.
Reassessing your portfolio regularly.
Once or twice a year, review the performance of your portfolio to make sure it’s on track to help you get where you want to be in terms of your financial future.
How to Open an IRA in 3 Simple Steps
Opening an IRA is typically a straightforward process. This is what it entails:
1. Choose Your IRA Type (Roth or Traditional)
Explore a traditional IRA vs. A Roth IRA to decide which one is right for you. Be sure to take into consideration your income now and in retirement, the tax situation that makes the most sense for your situation, the contribution level, and early withdrawal rules.
You can open an IRA at any one of a number of financial institutions, including a bank or an online brokerage, among others.
2. Fund Your Account
After you open an IRA, contribute up to the annual limit if you can to help maximize your investments. If you’re not sure how to fund an IRA, you can start with a few basic techniques.
For instance, you could use your tax refund to contribute to an IRA. That way, you won’t be pulling money out of your savings or from the funds you have earmarked to pay your bills. The same is true if you get a raise or bonus at work, or if a relative gives you money for a birthday. Put those dollars into your IRA.
Another way to fund an IRA is to make small monthly contributions to it. You could start with $50 or $100 monthly. You could even set up a vault bank account specifically for money designated to your IRA so that you don’t end up spending it on something else.
3. Choose Your Investments
Once you fund your IRA, you can start investing your money.That means you need to decide what assets to invest in. Consider your time horizon (or how long you have to invest), your goals, and how much risk you are comfortable with.
As mentioned earlier, assets that can potentially provide higher returns like investing in stocks come with higher risk than fixed-income assets like bonds. Figure out an allocation of the different types of assets that will help you reach your goal without keeping you up at night.
Considerations for Young Adults Looking to Start Investing
Young adults who are ready to begin investing should typically aim to get started as soon as possible. Thanks to the power of compounding returns, the longer your money has to compound, the bigger your account balance may be when you reach retirement.
When choosing an IRA, consider the tax advantages of traditional and Roth IRAs to decide which type of account may be most beneficial for your situation. Once you’ve opened an IRA, try to contribute as much as you can afford to each year, up to the annual limit.
Young adults should also think about their financial goals, at what age they plan to retire, and what their tolerance is for risk. Each of these factors can affect how they invest and what kinds of assets they invest in.
The Takeaway
An IRA can be a way for young adults to start saving for retirement. The earlier they begin, the longer their money may have to grow, which can make a big difference over time.
In order to choose the best IRA for young people, weigh the different tax benefits of Roth and traditional IRAs. If you’re leaning toward a Roth IRA, make sure you meet the income limit requirements, and if you’re considering a traditional IRA, check to see if you can deduct your contributions.
Once you’ve chosen the right IRA for you, start contributing to it regularly if you can. And no matter how much you’re able to contribute, remember this: Getting started with retirement savings is one of the most important steps you can take to build a nest egg and help secure your financial future.
Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
What are the different types of IRAs?
There are several types of IRAs. Two of the most popular are traditional and Roth IRAs, which individuals with earned income can open and contribute to. Contributions to traditional IRAs are made with pre-tax dollars and the contributions are generally tax deductible; the money is taxed on withdrawal in retirement. Contributions to Roth IRAs are made with after tax dollars, and the money is withdrawn tax-free in retirement.
Other types of IRAs include SEP IRAs for self-employed individuals and small business owners, and SIMPLE IRAs for small businesses with 100 employees or fewer.
Which IRA is suitable for young adults?
It depends on an individual’s specific situation, but for young adults choosing between a traditional or Roth IRA, a Roth may be a suitable choice for those in a low tax bracket now and who expect to be in a higher tax bracket in retirement. That’s because with a Roth, contributions are made with after tax dollars and distributions are withdrawn tax-free in retirement. With traditional IRAs, contributions are deducted upfront and you pay taxes on distributions when you retire.
Still, it’s important to weigh the different options and benefits to choose the IRA that’s best for you.
Can I have a 401(k) and an IRA at the same time?
Yes, you can have a 401(k) and an IRA at the same time. In fact, this could potentially be a way to increase retirement savings. You may be able to save more for retirement by having both a 401(k) — and contributing enough to get the employer match — and an IRA. Plus, with an IRA, you typically have a wider range of investment options than with a 401(k), and there may be tax advantages. For example, having a traditional 401(k) and a Roth IRA might provide flexibility when it comes to managing taxes now and in retirement.
What is the maximum I can contribute to my IRA in 2025?
The maximum you can contribute to a traditional or Roth IRA in 2025 is $7,000 if you are under age 50. Those ages 50 and up can contribute up to $8,000, including $1,000 in catch-up contributions.
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