Best Retirement Plans for Young Adults to Start Saving Early

Saving for retirement early can make a significant difference in long-term financial security. Thanks to compound growth, even small contributions in your 20s and 30s can grow substantially over time, reducing the need for larger savings later. The key is selecting the right plan based on income, employment benefits, and financial goals.

Employer-Sponsored Arrangements

Workplace retirement plans offer a simple way to save, often with benefits that accelerate growth. Many employers provide 401(k) or 403(b) plans, allowing employees to contribute pre-tax income, lowering taxable income for the year. Some companies also offer Roth 401(k) options, where contributions are made with after-tax dollars, but withdrawals in retirement are tax-free.

A key advantage of these plans is employer matching contributions. Many companies match a percentage of employee contributions, typically up to 3% to 6% of salary. If an employer offers a dollar-for-dollar match up to 5% and an employee earning $50,000 contributes that amount, the company adds another $2,500 per year—essentially free money that boosts savings. Not contributing enough to receive the full match means missing out on additional compensation.

For 2024, the contribution limit for 401(k) and 403(b) plans is $23,000, with an additional $7,500 catch-up contribution for those 50 and older. These limits adjust periodically for inflation. Some plans allow after-tax contributions beyond these limits, which can later be converted into a Roth account through a strategy known as the Mega Backdoor Roth.

Individual Retirement Accounts

For those without access to a workplace plan or looking to save more, Individual Retirement Accounts (IRAs) provide tax advantages and flexibility. The two main types—Traditional and Roth IRAs—differ in how contributions and withdrawals are taxed.

A Traditional IRA allows contributions to be deducted from taxable income, reducing the tax bill for the year. Withdrawals in retirement, however, are taxed as ordinary income. A Roth IRA, on the other hand, requires after-tax contributions, but qualified withdrawals—including earnings—are tax-free. This makes Roth IRAs appealing for young adults who expect their income and tax rate to rise over time.

In 2024, the contribution limit for both types of IRAs is $7,000, with an additional $1,000 allowed for those 50 and older. Roth IRAs have income eligibility restrictions—single filers earning above $161,000 in modified adjusted gross income (MAGI) cannot contribute directly, while those earning between $146,000 and $161,000 can contribute a reduced amount. Those above the limit can use a strategy known as the Backdoor Roth IRA, which involves contributing to a Traditional IRA and converting it to a Roth, though taxes may apply on converted amounts.

Withdrawals from Traditional IRAs before age 59½ typically incur a 10% penalty plus regular income taxes, though exceptions exist, such as using up to $10,000 for a first-time home purchase or covering qualified education expenses. Roth IRAs allow contributions (but not earnings) to be withdrawn at any time without penalties, offering more flexibility. However, using retirement savings early can reduce long-term growth.

Alternative Savings Paths

Beyond traditional retirement accounts, other savings vehicles can support long-term financial goals. Taxable brokerage accounts, for example, have no contribution limits or withdrawal restrictions, making them useful for those who want access to funds before retirement. Unlike tax-advantaged accounts, these investments are subject to capital gains taxes. Assets held for more than a year qualify for lower long-term capital gains rates, which range from 0% to 20% in 2024, depending on income.

For those with high-deductible health plans, a Health Savings Account (HSA) can serve as both a retirement and medical savings tool. Contributions are tax-deductible, growth is tax-free, and withdrawals for qualified healthcare expenses are also tax-free. After age 65, funds can be withdrawn for any purpose without penalty, though non-medical withdrawals are taxed as ordinary income. Contribution limits for 2024 are $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution for those 55 and older.

Real estate investments can also contribute to retirement planning, providing passive income and potential appreciation. Rental properties generate ongoing cash flow, while real estate investment trusts (REITs) offer exposure to the property market without the responsibilities of direct ownership. REIT dividends are typically taxed at ordinary income rates, though some may qualify for the 20% qualified business income deduction, reducing taxable income.

Early Access Considerations

Withdrawing retirement savings early can have financial consequences. The IRS imposes a 10% early withdrawal penalty on most distributions taken before age 59½, in addition to applicable income taxes. Some exceptions exist, such as for disability or unreimbursed medical expenses exceeding 7.5% of adjusted gross income, but withdrawing funds early reduces the benefits of compounding.

One way to access retirement funds without penalty is the Substantially Equal Periodic Payments (SEPP) rule under IRS Section 72(t). This allows individuals to withdraw a predetermined amount annually based on IRS-approved calculation methods. However, once initiated, SEPP withdrawals must continue for at least five years or until age 59½, whichever is longer, making it a rigid strategy that may not be suitable for short-term financial needs.