Personal Finance Series: Roth IRA
As college students, there is very little emphasis on the idea of preparing for retirement. With having to finance monthly rent, weekly spending on groceries, quarterly tuition payments, there really isn’t much left to put into saving for the future.
Despite all of this, I’d like to emphasize and discuss the importance of saving for retirement NOW, rather than waiting for a steady stream of income.
Why is it so important to begin investing for retirement as early as possible? Two reasons: to take advantage of compounding earnings and maximize contributions to your retirement account.
For many college students, the most relevant form of retirement account to consider investing with is the Roth IRA.
A Roth IRA is an individual retirement arrangement (account) that, at any age, you can put your money in and is a great starting point to grow your money for retirement.
Taking advantage of Roth IRA savings as young as you can (even as young as 15) is beneficial for the following reasons:
Money invested in a Roth IRA grows tax free
This is important to take advantage of especially if you expect to be at a higher tax bracket once you decide to take out your profits at retirement
You can open a Roth IRA at any age as long as you’re contributing after-tax earned income into the account
If you are under 18 (or 21 in some states), you will need to open up a custodian or guardian IRA
The earlier you save, the more time you have to grow and take advantage of compound earnings
i.e. You’d end up with more money at retirement if you start investing at 18 compared to if you started at 25.
You can withdraw your contributions (this does not include earnings) made to the account at any time with no tax or penalty fees
Some key things to note about a Roth IRA (2020):
You can open a Roth IRA through any brokerage service that supports retirement accounts (Vanguard, TD Ameritrade, Charles Schwab, Fidelity, etc.)
You can only contribute to a Roth IRA if your income is under $124,000 for individuals filing as single and $196,000 if filing as married.
Maximum contributions to Roth IRA is $6,000 ($7,000 if you are over 50)
For this reason, it is important to maximize your Roth IRA contributions by starting as young as you can before you hit the income threshold that prevents you from contributing to Roth IRA at all
You are allowed to withdraw your contributions and earnings penalty-free once you are age 59 1/2 and you’ve had the account for more than 5 years.
Withdrawing earnings before 59 1/2 may subject you to penalty and tax fees
With all these considerations in mind, here are the key takeaways:
You are not subject to penalties should you decide to withdraw the money you contributed into the Roth IRA account
Your money is growing tax-free as you invest within the account
You have the opportunity to invest in your future NOW
Why not take advantage of the benefits of the Roth IRA before your income reaches the threshold? If you are an avid investor in the markets, this is a great way to ensure that your earnings grow tax-free!
Interested in ways you can invest your money within a Roth IRA account? Check out our other articles where we outline different investment strategies and securities!
Sources:
https://www.schwab.com/ira/roth-ira
https://www.businessinsider.com/why-teens-should-be-saving-money-roth-ira-2017-3
https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2020
