Want to Invest in Your 20s? Start With This Account

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If you want to give yourself the best chance of growing a sizable nest egg for the future, it's a good idea to get started with investing as early as possible. Compound interest works best over a long period, so if you have the ability to contribute to a retirement account at the beginning of your working years, say, in your 20s, you should absolutely take advantage of the opportunity.

There's one account in particular that could do you a world of good. Here's why a Roth IRA is a great option for young investors.

A tax break later likely beats a tax break now

A major reason why it pays to consider a Roth IRA if you're in your 20s is because of how they work. A traditional IRA is funded with pre-tax dollars -- with this account, you get a tax break now, as those contributions lower your taxable income for the year you make them. But a Roth IRA is funded with post-tax dollars -- and in exchange, you can withdraw money in retirement tax-free.

Why does this matter for you now? The odds are good that now, in your 20s and likely with a pretty low salary, you are in the lowest tax bracket of your life. It might be more difficult to find post-tax dollars in your budget to contribute to a Roth IRA, but by the time you reach age 59 1/2, your taxes could be much higher. But you won't pay taxes on the money you've earned by investing with a Roth IRA.

It could serve as your emergency fund

First, a caveat: In an ideal world, your emergency fund is in a bank account without risk of money loss -- meaning a high-yield savings account (HYSA) or a money market account. Both of these come with FDIC insurance and offer fairly easy cash access. You'd get a debit card and/or check-writing privileges with the money market account, but the HYSA would likely come without a minimum opening deposit or balance requirement.

But in a pinch, a Roth IRA could also serve as your emergency fund. And if you're not earning enough money to also fund a high-yield savings account for unplanned expenses, it's certainly worth at least considering. Since you've already paid taxes on the contributions you make to a Roth IRA, you're allowed to withdraw those contributions at any time.

But you'll have to wait until at least age 59 1/2 (and for the account to have been open at least five years) before you can withdraw any investment gains in your account (with a few exceptions -- like $10,000 for a first-time home purchase). If you withdraw those earnings early for any other reason, you'll pay a 10% penalty and income taxes on the money.

You can enjoy a variety of features from the best brokers

Finally, a Roth IRA can be a great fit for new young investors because of the wide variety of brokers that offer them. You can find a Roth IRA with a long-established brokerage that has physical locations you can visit -- or with an online-only broker that exists entirely in cyberspace.

If you want to simplify your finances, you can find brokers that offer Roth IRAs alongside checking and savings accounts. Want to manage your account easily on your smartphone? Some brokers are known for their trading apps . And if you want to save money on fees, plenty of brokers keep them to a minimum.

Ultimately, a Roth IRA can be the best of all worlds for a brand-new investor in their 20s. They're easy to open, funded with post-tax dollars (up to $7,000 for tax year 2024), and can even help you handle emergency expenses or buy a home. Why not give them a closer look and start your investing journey today?

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