If children can invest in their future, what’s stopping students?
While an individual retirement account (IRA) may sound ludicrous to those in their twenties, older generations have reason to be jealous of people who start saving early. At its core, thinking about retirement sooner means more pay down the road.
From rags to riches
Despite their retiree-focused name, IRAs are available even to minors — as long as they’re earning money. The principle doesn’t change with adulthood.
Students working part-time or in a work-study program can begin putting savings into the account and allowing the investments to compound with time — something young people are able to build on for decades.
Albert Einstein once described compound interest as the “eighth wonder of the world,” saying…
When choosing the type of IRA, budding investors conscious about their financial future should look at Roth IRAs. It’s the ideal option for a few reasons.
According to SmartAsset, based on historic trends, the average annual return for a Roth IRA is between 7-10%. This means that, if one was to invest $6,000 a year — currently the maximum contribution — after 30 years, they could end up with over $500,000.
Simply put, this type of savings account allows for the investment of earned income. As this money has already been taxed, the savings can accumulate without the burden of being diminished later. This is unlike most other accounts, in which earned interest “is considered taxable income by the Internal Revenue Service (IRS) and must be reported,” Investopedia explains.
They’re also different from a typical 401k, which is only offered by one’s employer later in life and comes with less investment options. Instead, the money placed in a Roth account can be used in “stocks, bonds, ETFs, mutual funds, CDs, REITs and more,” according to the IRA Financial Group. It’s a large number of choices for real growth.
Not only do students have decades ahead to watch their savings grow, but because of their income, they begin in a lower tax bracket. This is to their benefit: According to Investopedia, unlike traditional versions of IRAs, Roths are designed to benefit those who’ll achieve higher brackets in coming years — a bachelor’s degree would surely help with that.
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Invest now, profit later
But, for those who consider retirement too far of a concern, the Roth IRA comes with some extra incentives for students. Namely, early withdrawals.
According to IRA Financial Group, unlike other versions, the Roth offers the most “qualified distribution” options.
For instance, students who are planning to become property owners after graduation can withdraw up to $10,000 when purchasing their first home, completely tax-free.
Other qualified withdrawals allowed under Roth IRA’s include free withdrawals after the age of 59-and-a-half, or in case of disability and after the holder’s death. Additionally, though not qualified, money retractions used to finance higher education aren't usually taxed, either.
While some of this may hamper the long-term benefits of investing, the extra money Roths accumulate can provide relief in moments of need — especially for students.
Setting up an IRA doesn’t have to be complicated. In fact, it’s easy.
As outlined by NerdWallet, one should begin by deciding on their investment preferences, choosing between a broker or “robo-advisor” — automated companies that make investments for you with a small fee.
A simple Internet search will provide countless options.
Contact Filip at demottf@dukes.jmu.edu. Filip is a junior and international affairs senior.