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PFCollege: Start Thinking About Roth IRAs

Posted By Jim On 09/25/2006 @ 12:14 pm In Retirement | 9 Comments

A 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 [3] (hence, PF College).


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[3] Personal Finance for College Students: http://www.bargaineering.com/articles/personal-finance-for-college-students-series/

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