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Are you thinking about opening a Roth IRA in your 20's?

Wondering if you should open a Roth IRA (individual retirement account)? You’re not alone—the number of 20-somethings who have Roth IRAs tripled from 2016 and 2022.¹ But opening an IRA in your early career isn’t necessarily the right move for everyone. There are income limits, but they usually don’t affect most young workers, especially if you’re just starting your career.² We’ll explain Roth IRAs and share three things for you to consider.

What’s a Roth IRA?

IRAs are retirement savings accounts with tax benefits that you can open on your own at a bank or other financial institution. Even if you have a retirement plan at work, you can still open an IRA.

The two most common types are traditional and Roth accounts. Both can help you to save for retirement, but they offer different tax advantages.

Comparing IRAs

Traditional IRA

Roth IRA

How are contributions taxed?

You contribute before paying taxes, which can lower your taxable income for that year.

You contribute with money that’s already been taxed.

How are withdrawals taxed?

When you withdraw money in retirement, you pay taxes on your contributions and any investment gains.

You can withdraw your contributions and earnings tax free in retirement if you meet certain conditions, including having your Roth account open for at least five years and reaching age 59½.

Who usually chooses each type?

People who expect to be in the same or lower tax bracket when they retire.

People who expect to be in a higher tax bracket in retirement.

How can you save the most for retirement?

If you want to be sure you’re saving as much as possible for retirement, congratulations! The earlier you start, the more time your savings and investments have the chance to grow. And your options can include your workplace retirement plan and IRAs.

You can have retirement accounts through your job and on your own, and both can help you save on your taxes. If your company offers a matching contribution in their 401(k) plan, consider contributing enough to earn the match. If you want to save the maximum amount allowed for retirement in 2025, you can save up to $23,500 in your 401(k) and $7,000 in an IRA.

Three things to consider when opening a Roth IRA in your 20’s

1 Taxes—Roth IRAs may be worth exploring because, at this point in your life, you’re probably in a lower tax bracket than you expect to be in later in your career. The taxes you’d pay on the money you contribute now would likely be less than what you’d pay if you’re in a higher bracket. Since you contribute with after-tax dollars, you won’t owe taxes on your contributions or earnings on any qualified withdrawals once you retire, provided certain conditions are met.3

2 Long-term growth potential—Starting a Roth IRA in your 20’s provides your contributions decades to potentially grow tax free. You can benefit from compound interest, where your contributions and any earnings keep building on each other. Even small contributions can turn into a substantial amount over 30 to 40 years. Plus, being young usually means you can handle a bit more risk, so you may  consider investing in things such as stocks, which may offer higher returns. Over time, stocks have generally delivered strong returns, which can help to boost your growth potential even more.

3 Flexibility—You can withdraw your contributions anytime tax free and without penalty, letting you access your cash if you need it for emergencies or unexpected expenses. (But if your withdrawal isn’t qualified, then your earnings may be subject to taxes and penalties.) How much you contribute can change each year, up to the annual limit, so you can add more when you have extra money or cut back if money is tight. The investment options often include stocks, bonds, mutual funds, and ETFs, so you can customize your strategy to fit your goals and how much risk you’re comfortable taking. Plus, Roth IRAs don’t require you to start withdrawing money at a certain age like traditional IRAs do, so your money has the potential to grow tax free for as long as you want, giving you more control over your retirement planning.

See how contributions can grow over time

Let’s see how much you could save by starting a Roth IRA in your 20’s. This example shows how regular contributions and compound interest can grow your savings over time.

Starting age

25

Annual contribution

$2,004

Average annual return rate

7%

Contribution period

42 years (from age 26–67)

Retirement age

67

Total contributions

$84,168

Estimated account balance at age 67

$508,238
This is a hypothetical mathematical illustration only. Figures are based on assumptions as set out, and individual circumstances may vary. There are no guarantees that the results shown will be achieved or maintained over any time period. It assumes no withdrawals and does not take into account fees associated with the investment. It does not represent any specific investment or imply any guaranteed rate of return.

Saving early builds good habits

Setting up a Roth IRA in your 20’s gives your money time to grow. Even small contributions can add up over the decades. With tax-free growth, the power of compound earnings, and flexibility, a Roth IRA can help you build a strong financial foundation for retirement. 

 

1 "Roth IRAs Holdings Have Shot Up among Young Households," Center for Retirement Research, 5/8/24. 2 For 2025, individuals filing as single can make a full Roth IRA contribution if their modified adjusted gross income (MAGI) is less than $150,000, and married couples filing jointly can contribute fully if their MAGI is less than $236,000. 3 A qualified distribution from a designated Roth account in the plan is a payment made after the participant attains age 59½ (or after death or disability) and after the designated Roth account in the plan has been established for at least five years. In general, in applying the five-year rule, count from January 1 of the year the first contribution was made to the designated Roth account. Participants should contact their plan consultant or financial or tax advisor for specific details on the five-year rule and whether any special rule may apply.

Any tax-related discussion contained in this publication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any tax penalties or promoting, marketing, or recommending to any other party any transaction or matter addressed. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this publication.

There is no guarantee that any investment strategy will achieve its objectives. It is your responsibility to select and monitor your investment options to meet your retirement objectives. You should review your investment strategy at least annually. You may also want to consult your own independent investment or tax advisor or legal counsel.

In this document, all tax disclosures regarding Roth 401(k) contributions are limited to the federal income-tax code and, in particular, all references to tax-free treatment of qualified distributions are intended to refer to the treatment of such distributions at the federal level only.

Distributions from Roth accounts must be “qualified” for both the contributions and earnings to be treated as tax free. Certain conditions would apply. See your plan document for more details. All references to tax-free treatment of qualified distributions are intended to refer to the treatment of such distributions at the federal level only. You may want to consult a professional tax advisor regarding any tax issues discussed.

Income-tax rules on how withdrawals are handled may vary from state to state.

 

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