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.

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 Five years after the account is opened, the deposited sum can be withdrawn without penalty or taxes.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 Since the funds can be used prior to retirement age, the IRS will allow a total of $10,000 to be withdrawn from a Roth IRA account towards say, your first home, without penalties.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

Latest College & Financial Aid News

Biggest / Largest Dollar Scholarships in 2020

January 16, 2020

by Susan Dutca-Lovell

When it comes to large dollar scholarships, mo' money means fewer problems in paying your college tuition bill. The average student will land between $1,000 and $5,000 in college scholarships after investing a decent amount of time and effort into applying for scholarships. Even smaller scholarships worth $500 are enough to cover books and fees, even if they aren't enough to foot an entire semester’s college tuition bill. [...]

Gap Year for National Service as a College Graduation Requirement?

January 13, 2020

by Susan Dutca-Lovell

Should students be required to and serve their nation either before or during college? Pete Buttigieg thinks so, as he has rolled out a $20-billion proposal to enlist young people in national service after high school in order to produce "civically informed and dedicated Americans." In his commentary, Why Colleges Should Require a Gap Year, Jonathan Zimmeran outlines why a gap-year would be the ideal timeline for this initiative. [...]

20 Scholarships for High School Seniors Class of 2020

January 8, 2020

by Susan Dutca-Lovell

High school graduation is right around the corner for high school seniors class of 2020 and - while many students may have already committed to their dream colleges - securing college financial aid is still a top-of-the-list priority in bringing that dream to fruition. Luckily, right now is the scholarship application peak season, with just enough time to apply for and win scholarships for college. Many 2020 scholarship deadlines are within the next several months, giving students like you sufficient time to conduct a free scholarship search and apply for those that best suit and interest you. Here's a sneak peek of the many scholarships for high school seniors class of 2020: [...]

Last Reviewed: January 2020