It’s Never Too Early to Start Retirement Planning! Why Your College Student Needs a Roth IRA

As cost for education continues to rise and student debt becomes an increasingly prevalent issue, it can be difficult to make retirement planning a priority for college students. But even if the golden years may seem eons away for your college-aged child, retirement planning should always be top of mind. If your student earns any sort of income before or during college, such as through a summer job or internship, it’s in their best interest to open a Roth IRA. It’s time to help your student understand the many benefits offered by this unique retirement account, as highlighted below:                                                                                                                           

Tax-free withdrawals and compounded growth. One of the most appealing aspects of a Roth IRA is that the money invested in this type of account is immediately taxed, so the account can grow tax-free until retirement. Therefore, your student will not be required to pay taxes on any capital gains or dividends on their investments. This also means that withdrawals made during retirement age will be free from income tax. In terms of compounded growth, Roth IRA’s are typically most appealing to younger people because their growth is often 4-8 times what they originally invested by the time they hit retirement age. If your student builds a diversified portfolio over the course of several years, they will be more likely to increase their average annual returns.

Flexibility. Roth IRAs are flexible in nature because they allow for money to be withdrawn tax-free and penalty-free before the retirement age of 59, apart from having to pay taxes and penalties on earnings. A Roth IRA can essentially serve as an emergency account, being a safety net for some quick cash if needed. With that being said, financial advisers typically discourage withdrawing from Roth IRAs because they are intended as retirement savings vehicles which should be used solely for retirement purposes. The good news is that if your student ever needs access to their funds, a Roth IRA provides the most flexibility out of any other retirement account.

Non-limiting. As your child graduates from college and lands a job, they may work for an employer offering a 401K match. Or, your student may decide to open up a traditional IRA for tax deduction purposes. Unlike other retirement options, the beauty of a Roth IRA is that it can be used in addition to other types of investments. As income and life circumstances change, your child can feel comfortable pursuing other retirement accounts while still maintaining a Roth IRA.

For these reasons, a Roth IRA is commonly believed to be the best retirement investment option for college students. Helping your student take advantage of the Roth IRA benefits outlined above can significantly help to set them up for retirement savings success.

Does your college student need some assistance getting a Roth IRA started? Look no further than Buffalo First Wealth Management and let us help your child take the first step toward retirement savings.