In your 20s, it’s easy to let retirement planning be something you’ll deal with later. Between housing costs, student loans, and entry-level salaries, a 401(k) or IRA might feel more like a “nice-to-have” than a “need-to-have.” But here’s the surprising part: the first retirement accounts you open may have the biggest impact on building future wealth.
Retirement savings grow over decades, and paying attention to accounts like 401(k)s and IRAs early in your career can help lay the groundwork for lasting financial security. Whether it’s enrolling in your first job’s 401(k), opening an IRA, or looking at a SEP IRA if you’re self-employed. The earlier you get familiar with these accounts, the more control you’ll have over how your retirement unfolds.
What’s a 401(k)?
A 401(k) is a retirement account you get through an employer. You can put part of your paycheck into the account, and the money is meant to be used once you reach retirement age. Some employers add to your account too, often through something called a “match.”
One unique feature of 401(k)s is the contribution limit. In 2025, you can contribute up to $23,500 if you’re under 50, and an additional $7,500 as a catch-up contribution if you’re 50 or over. That’s much higher than what you can put into an IRA, which we’ll cover in a moment.
Another thing to know is vesting. While your own contributions are always yours, some of your employer’s contributions may only fully belong to you after you’ve stayed at the company for a certain number of years. This is called a vesting schedule.
What’s an IRA?
An IRA (Individual Retirement Account) is similar to a 401(k), but you open it yourself instead of through an employer. There are different types of IRAs, the most common being Traditional and Roth IRAs.
- Traditional IRA: Contributions may be tax-deductible, but withdrawals in retirement are taxed.
- Roth IRA: Contributions are made with after-tax money, but qualified withdrawals are tax-advantaged in retirement.
For 2025, the contribution limit for IRAs is $7,000 (or $8,000 if you’re 50 or older). That’s the total across all your IRAs, whether Traditional or Roth.
What’s a SEP IRA? (For the Self-Employed)
Not everyone in their 20s has a traditional employer. If you’re freelancing, side-hustling, or fully self-employed, you may not get access to a 401(k) through work, but you still have retirement options.
One of the main options is a SEP IRA (Simplified Employee Pension IRA). It works a lot like a Traditional IRA but has much higher contribution limits. With a SEP IRA, you can contribute up to 25% of your net self-employment income, capped at $70,000 in 2025.
For people building their own business or doing gig work, a SEP IRA is often the go-to way to put money aside for retirement in a tax-advantaged account.
Why Your 20s Matter
Here’s the big advantage of starting in your 20s: time. When you put money into a 401(k), IRA, or SEP IRA early on, even in small amounts, you give it more years to grow. That’s because of compound interest: your balance earns returns, and then those returns start earning their own returns. Over decades, this snowball effect can turn modest contributions into something much bigger. These accounts are designed for the long haul, and the extra years you have in your 20s make a real difference by the time you reach retirement.
Using a 401(k) and IRA Together
You don’t have to pick just one type of account. If you have access to a 401(k) through work, you can contribute there and also open an IRA on your own.
Here’s how they complement each other:
- 401(k)s usually let you contribute more and may include employer contributions.
- IRAs typically give you more choice in where your money is invested and allow you to pick between Traditional and Roth for different tax advantages.
- SEP IRAs expand the options for anyone earning income outside of a traditional job.
Together, these accounts give you flexibility for how you save for the long haul.
Rolling Over Accounts When You Change Jobs
In your 20s, it’s not uncommon to switch jobs a few times. Each time, you may leave behind a 401(k) with your old employer. Over time, that can mean having multiple retirement accounts scattered around.
When you leave a job, you typically have the option to roll over your 401(k) into your new employer’s plan, into an IRA, or withdraw the funds. Rolling over into an IRA is often a popular move, since it keeps your savings in one place and helps you see your progress more clearly.
