As we move through high school, the looming burden of being financially independent creeps closer and closer. This milestone has caught many college students by surprise. Lacking the financial skills to start living independently, they inadvertently trap themselves in a cycle of bad credit, mounting debt, and financial illiteracy. Many never even get to think about investing.
But, what if one you could start life with a nest egg that is tax free; where every penny that you put in multiplies without you needing to pay a dime in taxes when you retire? A place to start is with a Roth IRA.
Note: This is not official investment advice. TRN is not legally permitted to act as a fiduciary or a caretaker of money or assets for another party.
1: What is a Roth IRA?
First off, the name. A Roth IRA is a type of Individual Retirement Account named after William Roth, a former Delaware senator, who sponsored the 1997 Taxpayer Relief Act, which introduced the Roth IRA.
One of the most important aspects of the account is the fact that you can withdraw the monetary contributions you have made to it, tax and penalty-free, at any time. However, to withdraw any earnings the Roth IRA has accrued over its lifetime, you must be 59 ½ and have had your Roth IRA account for at least 5 years. This is meant to incentivize holding your money in the IRA until you are ready to retire.
2: Why do I need one?
Roth IRAs are crucial for young people to start for a very important reason: many college students will be working for a job, not a career. You’ll likely have limited benefits, if any at all. A Roth IRA can be used instead of a 401(K) retirement plan if your company doesn’t provide one. It can also be used alongside a 401(K) for greater benefit.
3: How do I get one?
Like most things, the age requirement for opening a Roth IRA for yourself is 18. You may be allowed to have your parents open a Custodial Roth IRA for you. The maximum contribution for a custodial IRA is the same as for most adults, $6000 annually.
Most major brokerage firms offer some form of Roth IRA, though Fidelity Investments, Charles Schwab, and Merrill Edge are generally agreed upon as the best options. You’ll want to do some independent research, and talk to a representative from each firm about their offerings before you make your decision.
4: What do I do with it?
One of the best ways to invest with a Roth IRA is through consistently adding money into passive index funds. What is an index? Simply put, an index is a collection of publicly-traded companies used to show the results of financial sectors or the overall market. By investing in an index fund you typically have better financial stability than individual stocks.
That isn’t to say the returns aren’t incredible. The average yearly return of the S&P 500 is a whopping 10%. If you put $5000 into an S&P 500 index fund for 40 years, the expected result is that it would multiply 54 times to $268,500. With an extra $160 each month, it becomes a cool $1.2 Million.
The best part is you don’t even have to be a stock guru, you can just set up automatic contributions. You’ll never need to think about it another day in your life — or at least, until payday.
