Entrust Financial Services News and Articles

Roth IRAs for College-Aged Kids: Now That’s an Education

Do you ever wish you had started saving for your retirement years ago? Can you imagine if you had started saving when you were a freshman in college? Now imagine that you had started saving money your freshman year in an account that was tax deferred for life! Many of today’s college students can establish a Roth IRA and do just that.

To understand how valuable Roth IRAs can be, you first need to understand the difference between Traditional IRAs and Roth IRAs. For Traditional IRAs, you put funds into the IRA on a pre-tax basis. All of the profit from any assets in the IRA grow tax deferred until you start pulling out the funds at retirement age, which can start at 59½ years old. You are taxed on the money you withdraw at the tax rate you are in at that time.

With a Roth IRA, you put funds into the IRA on a post-tax basis. Because you have already paid the tax, any profit from the assets in the IRA grow tax free. When you reach the age of 59½, and you have had the Roth IRA for at least five years, you can take withdrawals. You do not pay any taxes on the funds as you pull them out of the IRA.

If you qualify to have a Roth IRA, you can contribute up to $5,000 per year with post-tax funds (if you are over 50 years old, the amount increases to $6,000 per year). Now let’s assume you had put $5,000 per year into a Roth IRA just during the four years that you were in college. You then left the $20,000 in the Roth IRA until you retired at 65 years old while it earned about 7.5% interest a year. In this example, that Roth IRA would have grown to over a half of a million dollars.

Putting $5,000 per year into a retirement account might sound like a significant amount of money to a college student, but let’s talk about a couple of different creative ways students can come up with the funds without changing their lifestyle too dramatically. Students can put a small percentage of their summer job or part-time job’s salary into their IRA anywhere from once every paycheck to just once a year. Perhaps the student can let aunts, uncles, and grandparents know that they are trying to be financially responsible and save for retirement. Often, when a family member hears this information, they are willing to give money for birthdays, Christmas, and other holidays.

If the student had a self-directed IRA with Entrust, they could really take control over their investments and truly diversify their portfolio over the next 40 years until they retire. Can you imagine what that half a million dollars could do for their future?

By Jennifer Williams, Entrust Financial Services
Jwilliams@theentrustgroup.com