It is never too early to plan for retirement. Even at 20 years old a college student can invest their money into an individual retirement account. Junior finance major Will Fitzgerald started a Roth IRA last summer.
“It is an individual investment option with limited contributions and tax free distributions,” said Fitzgerald, referring to the compounding growth of an account held over a long period of time.
Traditionally, the government’s social security plan stood as a retirement fund for many, until demand from baby boomer retirees surpassed the supply from contributing employees.
“A lot more people are beginning to draw from social security than are putting into it … so the government is trying to do more of the self-create retirement plans,” said Charles Ruscher, senior finance lecturer at the Cox School of Business.
The Roth IRA is an account through either your bank’s local branch or an investment firm like Fidelity or Vanguard that can hold a diversified portfolio of stocks, bonds, securities and other investments.
There are several tax benefits to young Roth IRA account holders. First, the money you choose to invest in the account is taxed before your contribution, allowing the money to grow tax-free. The benefit being, no tax deductions to your contributions if you withdraw after the age of 59 ½, and the account has been in existence for at least five years.
That means you pay tax on the initial investment, a lower value, rather than the amount you withdraw upon retirement, the compounded value. And since the investment grows tax free, every dollar works for you, with none being siphoned off to pay taxes. In addition to growing tax free, your initial contribution is taxed at your current income tax rate – which is a benefit, assuming your rate is lower now than it will be years from now.
Alongside its benefits, come its restrictions. For a Roth IRA, if you are single and have an income below $101,000 you can contribute a maximum investment of $5,000. You cannot put in more than your income and you can not withdraw any of your earnings before the standard retirement age, 59 1/2, without incurring a penalty.
“You can contribute $5,000 each year until retirement, … All contributions you are making are to be withdrawn without being taxed,” said Sarah Igartua, a representative of Bank of America’s CD and IRA department.
For the young, it’s not just a tax relief: it’s the time value of money. For example, assuming you’re 20, if you decided to start a Roth IRA, investing $1,000, with a current tax rate of 10 percent, the total investment minus taxes would be $900. Then say you don’t invest ever again, but that money grows at a rate of about 7 percent a year. You would have about $13,029 by age 59 ½. That is investing just once. Invest $900 every year for 10 years and not for the remaining 29 ½ until you reach 59 ½, and you will have about $51,487.
“The time value of money lets earnings compound … Not having to pay income taxes allows it to grow a lot faster too,” said Ruscher.
To find out more about Roth IRA and other retirement options, go online, research and talk to financial advisors. Compare the investment fees of the firms like Fidelity or Vanguard to those at your local banks. Make sure the bank is covered by the Federal Deposit Insurance Corporation, and contribute as much as you can, explains Fitzgerald.
“The time value of money is so advantageous. …You could be getting an extra million,” he said.
