The Roth IRA

Students with Retirement Plans

The last thing college students may care to think about is retirement or what they will be doing when they are 65. You may be surprised to find that the Roth Individual Retirement Account (IRA) is one of the best options for saving money for, even if you're not near retirement. It makes sense to do especially when you're young and in a low tax bracket - small deposits can later reap big savings.

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Roth IRAs are easy to open. Do a simple Internet search or check with your local bank because you are eligible as long as you have a job with a steady income. The money invested towards retirement through a Roth IRA is already taxed so it will grow tax-free until retirement. Withdrawals will not be taxed by the government. Five years after the account is opened, the deposited sum can be withdrawn without penalty or taxes. A withdrawal of the earnings from that deposit will be taxed. Before the five-year mark, withdrawals will be penalized by 10% unless they are used for qualified expenses such as education. You also have the choice of investing in stocks, bonds, mutual funds, certificates of deposits and estate investments. Post-college, eligibility and deposit limits will be determined by marital status and earned income status. Single individuals and married couples will have different limits, so check with the IRS for limitations based on the year.

Money used for education can be taken out of an IRA without a penalty fee. Unfortunately, any profits made from your deposit will be taxed. For example, if a parent deposits $5,000 into their IRA, and the money grows to $7,000 before 5 years, the parent can withdraw the initial $5,000 without a penalty fee. The additional $2,000 will be taxed. After 5 years, there are no fees or restrictions.

Unlike 529 plans and Coverdell accounts, money from an IRA can be used for anything after 5 years. Even young investors appreciate having leftover money that will grow tax-free and allow for greater spending freedom. Since the funds can be used prior to retirement age, the IRS will allow a total of $10,000 to be withdrawn from a Roth IRA account towards say, your first home, without penalties. For married couples, the limit is $20,000.

Keep in mind that like 529 plans and Coverdell accounts, there are spending restrictions on goods bought before 5 years. To avoid a penalty, the amount of money spent on education cannot exceed the cost of tuition, housing fees, and books.

Roth IRA accounts are the best options for those looking to save for college and put away for retirement. The money being saved will be available in the future if something unexpected occurs. Then after graduation and landing a job, you can consider more investing options.

For more information on the Roth IRA, visit: http://www.irs.gov/retirement/article/0,,id=137307,00.html

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Last Reviewed: February 2023