I’m 25. How Much of My Salary Should Go Into My IRA?

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It pays to contribute as much money as you can to an IRA, even when you’re really young. Read on to see why. 

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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