5 Pros & Cons of Opening a Retirement Account in Your 20s

There’s no question that retirement saving is an important financial goal. There are very few people who want to work their entire lives when they could retire and enjoy their golden years. But when should you start saving for retirement?

At Addition Financial Credit Union, we’re often asked about the pros and cons of opening a retirement account at a young age. While retirement planning is important, it’s not the only step to managing your money when you’re young. So, with that in mind, let’s review the topic of retirement savings in your 20s. What types of accounts are best for young people, how much do you need to save each month, and what are the pros and cons of prioritizing retirement saving at an early age?

What Types of Retirement Accounts Are Best for Someone in Their 20s?

There are several considerations to keep in mind when choosing a retirement account in your 20s. Here are some options to consider:

Employer-Sponsored 401(k) or 403(b) Accounts

If you’re a full-time employee and your employer sponsors a retirement plan, that’s the first option we’d recommend for people in their 20s. The primary reason we’d start with a 401(k) is that there’s a higher annual contribution limit ($23,000 as compared to $7,000 for IRAs). With an employer-sponsored plan, contributions are made on a pre-tax basis in most circumstances, which means choosing a 401(k) will reduce your taxable income, too.

Roth IRA

One of the trickiest things about retirement planning at an early life stage is that you’re likely to be earning far less than you will at retirement. That can make it difficult to estimate how much you’ll need for a comfortable lifestyle in retirement. 

We suggest a Roth IRA for people in their 20s. You’ll make contributions on a post-tax basis. That means you won’t get an immediate tax benefit but you’ll be trading that for tax benefits after you retire. Because Roth IRA contributions are not tax deferred, all growth of your money and future account distributions will be tax free.

Traditional IRA

A traditional IRA is similar to most 401(k) plans because contributions are made on a pre-tax basis. If you don’t have an employer-sponsored IRA and you make contributions on a post-tax basis, you have the option of taking a deduction when you file your taxes. We’d still recommend the Roth IRA in that case.


A Savings Incentive Match Plan for Employees, or SIMPLE IRA, is a type of employer-sponsored retirement plan designed for small employers who don’t already have a retirement plan. If your employer doesn’t offer a 401(k) plan but offers a SIMPLE IRA, we recommend taking advantage of it because it’s mandatory for employers to match employee contributions up to 3% of their compensation.

5 Pros and Cons of Retirement Savings in Your 20s

Now that you have our retirement plan recommendations, here are five pros and cons of opening a retirement account while you’re still in your 20s.


Let’s start with the advantages of opening a retirement account in your 20s.

#1: Tax Benefits

As we’ve already mentioned, there are tax benefits to all retirement accounts. For people in their 20s, one of the biggest advantages is that any pre-tax contributions you make to a retirement plan reduce your taxable income. That translates to a lower tax obligation and more money in your pocket.

Even post-tax contributions to a Roth IRA have their benefits, although you won’t reap them until later in life. You won’t defer taxes or be able to take a deduction now, but your earnings and withdrawals will be tax free, something that’s important if you believe you’ll be in a high tax bracket when you retire.

#2: Compound Interest

It can take a long time to save enough money to retire. Even if you retire at full retirement age, which is 67 years old for people born after 1960, you’ll need 10 or more years of savings with an average life expectancy. If you’ve got longevity in your family, you might need 15 to 20 years of savings.

The biggest advantage of saving early is that you’ll have a lot of years to take advantage of compounding interest. If you start saving early, get an advantageous return on your investments and do a good job of managing your risks and asset allocation, it won’t be difficult to save enough even if you don’t contribute large amounts to your retirement account. Waiting until later means you’ll need to save more and earn less, which can make it difficult to reach your retirement savings goal.

#3: Early Retirement

When you start saving early, you may be able to consider early retirement without worrying about having enough money to pay your expenses. With consistent contributions and compound interest, people who save early come out way ahead of those who wait until later in life to start saving for retirement.

You might not get full Social Security benefits if you retire early, but with careful budgeting and planning, possibly with a financial advisor, you can save enough to allow you to do whatever you want with your time after you retire.


Here are two cons to consider before you open a retirement account in your 20s.

#4: Reduced Take-Home Pay

The first downside of opening a retirement account in your 20s is that you’ll have less take-home pay. That might not be an issue for those who are earning enough to easily pay their expenses, but it could be if you’re in a low-paying job or a gig worker.

Lower take-home pay may impact your ability to pay for your rent or mortgage, save for a house or even have kids. You’ll need to weigh the risks of waiting against the benefits of having more money in your pocket each month.

#5: Slower Student Loan Debt Repayment

A lot of people in their 20s are carrying tens or even hundreds of thousands of dollars in student loan debt. That can make it difficult to contribute to a retirement account particularly if your financial goal is to get out of debt as quickly as possible.

The advantages of accelerating your student loan repayment is that you can save thousands of dollars in interest. You’ll need to review your budget and decide if you can afford to pay your loans and open a retirement account.

How Much Should I Am to Contribute to My Retirement Account Each Month?

There’s no one-size-fits-all answer to how much you should contribute to a retirement account in your 20s. Your budget and strategies for managing money will both play a role.

How Budgeting Can Help with Retirement Contributions

Budgeting is essential whether you’ve got a huge salary or you’re living paycheck to paycheck. In your budget, you can allocate money to save and make sure you’ve got the funds you need to pay regular monthly expenses.

We always suggest that people create a household budget and prioritize savings. You’ll need to start with your take-home pay and allocate funds for your needs. These may include:

  • Rent or mortgage payments
  • Car insurance and gas
  • Utilities
  • Student loan payments
  • Groceries

Whatever is left over can be divided between discretionary spending and saving. You may want to split your savings between an emergency fund and retirement savings.

How Much to Contribute to an IRA

Our recommendation is to try, at minimum, to open an IRA and max out your IRA contributions if you can afford to do so. The maximum contribution for IRAs in 2024 is $7,000. That works out to $583 per month.

If you can’t afford that amount, we still recommend contributing as much as possible. As we noted previously, small amounts saved at an early age add up to more savings than large amounts contributed later in life.

How Much to Contribute to a 401(k)

Your 401(k) contribution may be significantly higher than your IRA contribution. The annual limit as of 2024 is $23,000 and you may be eligible for employer matching contributions. We would recommend contributing enough to max out employer matching. For example, if you’re earning $80,000 and your employer matches contributions to 6%, you would contribute $4,800 per year and get another $4,800 from your employer for a total of $9,600 in savings.

If you’re earning enough to contribute the full $23,000 maximum to your 401(k) plan, you’ll have the best possible chance of saving all you need for a comfortable and enjoyable retirement.

Start Your Retirement Savings with Addition Financial

Opening a retirement account in your 20s is the best way to maximize your earnings with compound interest and avoid the risk of outliving your savings. The 5 pros and cons we’ve listed here can help you evaluate your options and make the best choice for your future.

Are you ready to open a retirement savings account? At Addition Financial, we offer Traditional, Roth and Term Share IRAs. Click here to learn more and open your account today.

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