Why College Students Need a Roth IRA

It’s a hard time to save, but worth every penny.

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What's the last thing on the mind of your typical college student? If you guessed retirement, you're probably right. With their first taste of freedom, life outside their parent's home, and all the new pressures of college (studying, social life to name a few), it's not surprising that college students don't really care about retirement, Roth IRAs, or what they'll be doing when they're 65.

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While they don't have a lot of money, they do have the one thing that retirement planning covets—time. If a student has a work study program or even just a part-time job delivering pizzas, it might be a good time to think about contributing to a Roth IRA. There are so many financial reasons why contributing to a Roth IRA makes perfect sense for someone who is young, and in a low tax bracket, but the biggest reason is that it's great for a young person to focus on their finances at an early age. Those small deposits put into the right retirement vehicle can reap some major savings.

Why Roth IRAs Make Sense

Roth IRAs are simple to open. You can find providers by doing a simple Internet search or by checking in with your local bank. As long as you have a job where you earn income, you can be eligible to open a Roth IRA account.

The money you invest towards retirement using a Roth IRA is already taxed so it is allowed to grow tax-free until retirement. When you make a withdrawal , you the amount will not be taxed by the government. Within a Roth IRA account, you can also maintain stocks, bonds, mutual funds, certificates of deposits, and real estate investments as your progress in your investing experience. After college, eligibility and deposit limits will be based on your marital status and your earned income status. For single individuals, income earned must be below $105,000 and married couples have a limit of $166,000 in income limitations. For 2010, Roth IRA contribution limits max out at $5,000 but the amount does change from year to year. Check with the IRS for limitations based on the year. Once you have deposited the maximum amount, you will no longer be allowed to contribute it.

Contribution Limits

You can contribute a maximum amount in line with what you earn from your job. If you have made $2,500 from a part time job, you can contribute the same amount into your Roth IRA throughout the year. Monies from other sources including scholarships or from your parents can not be deposited into the account. Only money you have earned from a job, and reported to the IRS, can be contributed.

The Roth IRA is a perfect choice for college students because the money you are saving for the future is still available in the event something unexpected happens while still in school. You have access to the funds when you need them. After graduation, when you land a job, you can consider more serious investing strategies.

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Immediate Future Benefits

While the Roth IRA is designed to save funds for retirement, the funds can be touched before retirement age. Consider another advantage of a Roth IRA account is that when you graduate college and secure a job, the IRS will permit a total of $10,000 to be withdrawn from your Roth IRA towards your first home without penalties. As long as you have had account opened for five years or more, you can use tax-free money to buy a home. For married couples, $20,000 is the limit. Roth IRA accounts offer this great incentive for saving money towards the start of your brand new life as well as your distant future.

So even if you can only put a few hundred dollars a year, start doing it today if you can... you'll be very happy with yourself in forty years.

Jim Wang writes about personal finance at Bargaineering.com. When he's not tackling money issues, he's usually look forward to his next vacation and writing about it at Wanderlust Journey.