Just Starting Your Career? Here's the Best Way to Save for the Future

If you're in your early 20s, just starting your career, in your first "real job," and starting to figure out how to save for retirement: congratulations! You have decades ahead of you to save, invest, and watch your investments grow.

You have a few good choices to maximize your retirement savings and minimize your taxes. But probably the best way to save is to open a Roth IRA and (if your job offers it) a Roth 401(k). These retirement accounts offer special advantages to help you build financial security.

Let's look at the best way to save for the future as a young person starting your career.

Why you should open a Roth IRA

If you're a young person starting your career, the No. 1 best way to save for retirement is to open a Roth IRA ("individual retirement arrangement") account. This is a special type of tax-advantaged retirement account that lets you save and invest for the future with tax-free investment earnings and tax-free income when you retire. For 2024, you can put up to $7,000 into a Roth IRA.

Here are a few good reasons why people early in their careers should open a Roth IRA.

Reduce your taxes in retirement

A typical 401(k) or traditional IRA gives you a tax break for putting money in -- the contributions reduce your taxable income for 2024, but you have to pay taxes on the money when you retire. These are also called "tax-deferred" retirement savings accounts, because the tax is delayed ("deferred") into the future.

Unlike a 401(k) or traditional IRA, putting money into a Roth IRA does not give you a tax deduction on this year's taxes. But instead, it gives you valuable tax-free investment growth and a source of tax-free withdrawals in retirement. With a Roth IRA, you pay slightly more taxes in 2024 so that "future you" doesn't have to.

Right now, you are (probably) in the lowest tax bracket of your life

Many young people nowadays feel gloomy about their personal finances -- burdened by debt and underpaid at work. You might not feel like it now, but your income is going to increase. You're going to improve your skills and professional value, get promoted and earn pay raises, and get more marketable and in-demand for career opportunities. Maybe you'll start a side hustle to make extra money, or launch a small business to boost your income even more.

Over the years of what's hopefully a long and prosperous working life, you're going to make more money than you make now. Right now, as a young person just starting out, your taxes might be as low as they'll ever be again. You can take advantage of this low tax rate by opening a Roth IRA.

For example, if you currently are single and earn a $60,000 salary, that means (after subtracting your standard deduction), your taxable income is in the 12% tax bracket for 2024. Let's say that in the future, when you retire, your income has doubled (in 2024 inflation-adjusted dollars) to $120,000. Assuming the same standard deduction, you'd be in the 24% tax bracket -- making it much more costly to put money into a Roth IRA, or pay taxes on the (taxable) retirement income from a typical 401(k) or traditional IRA.

Paying a bit of tax today to put money into a Roth IRA when you're young can be a much better deal for your future self. This is a smart tax-planning strategy to take advantage of your young age.

Let your money grow tax free for decades

Speaking of age, another advantage you have at this stage of your career is that you have decades to save for retirement. If you're 25 years old, you have 42 years left until your Social Security retirement age of 67.

Maxing out your Roth IRA can let your retirement savings grow (tax free) for decades to come. For example, let's assume you put $7,000 into a Roth IRA in 2024, and then contribute another $7,000 every year for the next 30 years. And let's say you invest that money in a diversified portfolio of stocks and bonds that delivers an average return of 8% per year.

After 30 years, you'd have $926,860 in your Roth IRA -- tax free!

Why you should open a Roth 401(k) -- if your employer allows

Does your employer offer a Roth 401(k)? There's nothing wrong with putting money into a tax-deductible 401(k) to save for retirement, especially if you get an employer match on your contributions. But if your employer offers a Roth 401(k), you should consider using that instead.

A Roth 401(k) works like a Roth IRA: the money you put into it is not tax deductible, but it grows tax free. You can still get your employer matching contributions to a Roth 401(k), and the Roth 401(k) also has higher contribution limits than a Roth IRA. For 2024, you can put up to $23,000 into a Roth 401(k). And you can use both types of accounts -- a Roth 401(k) and a Roth IRA -- as long as your income qualifies; some higher earners are not eligible to put money into a Roth IRA.

Bottom line

If you're in the early stage of your career, opening a Roth IRA, Roth 401(k), or both can be the best options to save for the future. These retirement accounts let you invest for the future with tax-free growth and tax-free income in retirement.