In the eyes of a college student, retirement seems far enough away that it can be seen as inconsequential, allowing young adults to place the practice of retirement on the back burner.
“As a college student right now, we’re not getting younger. You have the most amount of time to put money to work for you,” said Auburn’s Department of Finance Program Champion and former financial advisor at Northwestern Mutual Mandy Harrelson. “If you invest some money today then it has a much longer ability to grow for you and work for you.”
Retirement investing has a multitude of investment vehicles such as a Roth IRA, a traditional IRA and a 401(k). All of these are innately similar in how they work, but a Roth IRA has distinct differences in how it can benefit the financial livelihood of college students down the line.
What is a Roth IRA and why do college students love to talk about it?
In recent years, there has been an increased popularity and awareness among youth culture regarding the importance of starting a Roth IRA, but why is this?
“It’s the only gift that the government is going to give you,” said Chief Strategy Office of Auburn Financial Management Association (FMA) John Boles commenting on the importance of starting a Roth IRA early. “Even contributing small amounts monthly is phenomenal.”
A Roth IRA’s investing qualities benefit college students or young adults entering the workforce due to its post-tax qualities. Unlike traditional IRAs or 401(k)s, this type of investing uses dollars that have already been taxed and when one pulls their money out it is not subject to capital gains tax.
“Roth (IRA) is really good when you’re younger because it’s based off of your annual income,” said FMA Director of External Engagement Mia Bechara. “So if you make a certain amount of money a year, you’re going to be taxed a little bit less than you would when you’re 50 years old and making money.”
The restrictions of an IRA
Roth IRAs have their unique set of rules. Investing in a Roth IRA restricts one from taking out their money until age 59½. “We need to make sure we’re not needing to touch this money anytime soon,” Harrelson said on the prospect of budgeting with an IRA.
Income thresholds can limit those that apply for this type of retirement investing. Individuals filing for taxes on their own or those in a joint scenario cannot open a Roth IRA if they are above the $153,000 or $228,000 mark respectively. Reaching $138,000 as a single filer or $152,999 as a joint filer comes with investment limitations.
“Most college students are making less than that. They have the advantage of being able to do a Roth IRA,” Harrelson said.
Additionally, a Roth IRA has limitations regarding the maximum amount of money allowed to be invested into a portfolio each month with the limit standing at $6,500 for those below 50 and $7,500 for those 50 and above.
The importance of saving
Putting away as little as $20 a month into a retirement plan whether that be a Roth IRA, a traditional IRA or even something as simple as a basic investment account can make a world of difference for one’s economic future.
“You can’t overstate the importance, or the significance of the burden that it takes off of you in the future by starting today,” Boles said. “Right now, we’re college students, we have classes and we think we’re stressed out, but this is nothing compared to when we hit real life. So the earlier you get started, also, the more experienced you become, it’s going to make you more knowledgeable in all aspects of life.”
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