Why a Roth IRA is Essential to a Student’s Portfolio
In the summer before my freshman year of college, my family threw a graduation party for my sister and I. (We’re twins.) I’m sure many of you had them too; a party to celebrate the end of high school, the beginning of a new chapter in life, and most importantly, to collect some much needed cash for the four years ahead.
While most of the very generous gifts I received were in the form of cash or gift cards, I received one envelope from a friend’s father who I had become friendly with. Inside the envelope was $75 (a large sum for a man who wasn’t super well off himself) and a note. On the note was an explanation of why I needed to use the money to open a Roth IRA as soon as possible. I had been interested in investing for a couple years at that point, but hadn’t learned too much yet, and hadn’t even thought about saving for retirement. I was just investing because it was interesting and I liked looking at stocks and trying to “time the market” (bad idea, I lost money in those first couple of years). At the time, I was surprised and thankful, but I didn’t think about it too much, and it fell by the wayside as I continued to invest in common stock.
However, in the past six months, I have committed myself to learning as much as possible about both personal finance and investing so that I can build wealth early in life. In doing this I recently saw my friend’s dad again, and he asked me if I had started the Roth IRA. I said I hadn’t, and he told me to get on it ASAP. So, I looked a bit more into it, and realized what I had been missing for the past year.
Saving for Retirement Early
Many college age students come into school thinking about things such as classes, making new friends, and having independence for the first time ever. What they should begin thinking about is starting to put away money for retirement. The huge advantage a freshman in college has over a young college graduate is that he has four extra years for money to compound. This could mean a difference of thousands of dollars over the long run.
Putting away a few hundred dollars of that hard earned summer cash in a Roth IRA each year in college may not seem like much at the start, but that money adds up fast.
Why You Should Get a Roth IRA over a Traditional IRA
As a college student, unless you have found something that you need to tell me about, you are probably taking in a pretty low income. While this may seem like a bummer at first, there is one cool thing about being poor; you don’t pay much in taxes! Unless you make more than $9,325 a year, you only get taxed 10% on your income. This means that it is extremely cheap to put your money into a Roth IRA. And once it’s in there, it compounds tax-free, and you can withdraw tax-free! How sweet is that?
Another reason a Roth IRA is nice is that, if you need to, you can make withdrawals on your gains without penalty. This is nice to keep in mind, because it gives you sort of a second emergency fund (hopefully you have at least $1,000 saved somewhere else too) to draw on if life happens (AKA you need to make any major payments or purchases quickly).
Best Places to Get a Roth IRA
You can open a Roth IRA in many different places, including at some banks, brokerage accounts, and automatic fund management services like Betterment. Personally I have opened up an account with Betterment because of its low fees and automatic free re-balancing of my portfolio. I can also set it up to deposit a certain amount from my checking account into my Roth IRA every month without me having to do anything!