Want More Money? Start Investing Early

For a young college-aged student, the idea of retirement is often viewed as a topic of discussion for later in life. The more that college-aged students push the idea of retirement away, the more money they may be losing. In order to maximize growth potential, investing should begin as early as possible.

There are many different ways to invest one’s hard-earned money. People can invest their money into individual stocks and bonds, real estate, retirement plans, and even cryptocurrency. Given these investment opportunities, one question always seems to arise: Which one is “the best?” Many factors play into cumulating an answer for a specific investor. One of the primary factors of choosing the best retirement plan option is the age of the investor. The given age of an average American college-aged student is typically between 18-22 years, and the average retirement age is 65. This allows for roughly 45 years to invest one’s money.

Given this information, one of “the best” retirement savings options for a young adult is the Roth IRA.

A Roth Individual Retirement Account (IRA) was created by the Taxpayer Relief Act of 1977 and was named after the late Delaware Senator William Roth, who was the primary sponsor of the bill. What makes a Roth IRA beneficial is the type of money that is invested. Investments are made with post-tax money rather than pre-tax money as with a traditional 401k plan.

Another intriguing component of the Roth IRA is that the withdrawal of earnings is tax-free under basic circumstances. Similar to a 401k, once an individual becomes 59 ½ years old, they are allowed to take withdrawals from their Roth IRA. However, the difference is that withdrawals from a 401k plan are taxed at the investor’s marginal tax rate in the year of distribution. A retired individual may be in a higher tax bracket later in their life, which makes 401k withdrawals treacherous. On the flip side, Roth IRA withdrawals are tax-free, because the taxes were already paid on the money at an earlier stage in life.

College-aged students are generally in the lowest tax bracket and should reap the benefits of this by contributing to a Roth IRA early. No matter how young you are, the reality of retirement is fast approaching, and it is better to face that reality with a well invested Roth IRA.

About Schneider Downs Tax Services

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To learn more, visit our dedicated Tax Services page. 

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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