PFCollege: Start Thinking About Roth IRAs

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Personal Finance for College Students Series SealA Roth IRA is one of the most intruiging and most often discussed (argued) means of saving for your retirement. You contribute post-tax dollars into a retirement account that will appreciate tax free. You can also withdraw your contributions (but not the appreciate of those contributions) tax free at any time. While the awesomeness of the Roth IRA can and probably will debated until the end of time, let’s move past that for now.

The only significant requirement that a college student needs to know is that you can’t contribute more than what you earn in a year. So if you had an income of $2,000, as reported on your tax return, then you can’t contribute the maximum of $4,000 – you can only put in $2,000 (because that’s your income). What’s nice is that there is no requirement that the money you contribute has to be the money you actually earned, so you can earn $2k, spend it on books, tuition, beer (just kidding Mom!), etc.; and then get $2k from your parents to put into your Roth IRA and it’s entirely legitimate.

Why should you (and your parents) do this? That $2,000 can do so much more for you, growing tax free, than it can for your parents from a retirement funding perspective, if you consider that you are four decades away from retirement. While you are young and can afford it, saving as much as you can in retirement is crucial because time is on your side.

Don’t really want to ask for a few thousand dollars from your parents for “retirement” (especially since they will probably be helping as much as they can for school)? Structure it as a loan and pay that loan back after you graduate and start working, they’ll appreciate how responsible you are in thinking of your retirement.

This article is part of a new series I’ve started called Personal Finance for College Students (hence, PF College).

{ 9 comments, please add your thoughts now! }

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9 Responses to “PFCollege: Start Thinking About Roth IRAs”

  1. Steve Mertz says:

    Dear Jim-This is an excellent idea…So good that I was wondering if you might give me a small loan to fund my Roth. Seriously, Great idea and great advice-pay the taxes now and let this bad boy grow tax free!

  2. JSH says:

    The income restrictions on Roth IRAs are another argument for starting early on a Roth IRA. Depending on your career choice and geographic location, the number of years you can contribute to your Roth may be limited.

  3. Kamry Bowman says:

    For college students going into debt for college, does it make more sense to put as much money towards paying down the loans, rather than beginning retirement savings?

  4. twins15 says:

    Great advice! I’m in college right now, but have already put some money into a Roth, and now put a little bit in each month. I can’t afford much obviously at this point, but I figure anything is better than nothing.

  5. jim says:

    Kamry – It depends on the rates of the loans and whether they’re fixed or variable. If your loans are fixed rate loans and the the rates are low (low being defined as close to or lower than the rates of online savings accounts, so around 5.25%), I would recommend making the minimum payments and saving for retirement. If they are variable, I recommend consolidating them into a fixed rate loan if you can. If the rates are high, I would try to strike a balance between the two because most college graduates will be able to write off all or part of their student loan interest on their taxes (this phases out at around 65k/yr income I believe) so you can afford to not pay a little. I know it’s not a clear cut answer but that’s all I have. 🙂

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  7. saving money says:

    So if you had an income of $2,000…

    While I’m sure most personal finance people know this, I just wanted to make clear to students that the money that you earn must be “earned income” – if you receive your income from interest from stocks or other sources that are deemed “unearned income” by the irs, you can’t place that amount into a roth ira.

  8. G says:

    If you are sued, can someone go after your retirement accounts, like a roth ira?

  9. sophomore says:

    The question always on my mind is why save for retirement when you can focus on saving for a house? Sorry, newbie about personal finance in general. Why is it good to save tax-deducted income? Why not just put it in some bond?

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