College> Finance > Investing for the Future: Roth IRAs

Investing for the Future: Roth IRAs

by Jan Michael

College and High School Students  
Open a Roth IRA today & start building your fortune tax-free. 

An important savings tool that is over looked by many college and high school students is a Roth IRA. When considering a saving plan, most students are thinking about short-term savings for new clothes, a car or college expenses.  However Roth IRA’s provide a powerful way for young workers to save tax-free.  Even small regular investments in a Roth can reap huge long-term benefits for any student that is employed.  

Why a Roth IRA? What if I need my money?

A Roth IRA is a terrific investment, because your contributions grow tax-free and the IRS rules provide great flexibility regarding withdrawals. To get the most benefit from this type of account you should try to leave this money to grow untouched, however, your contributions to the Roth IRA account can be distributed tax-free at any time, for any purpose.  However, Roth IRA earnings can only be distributed tax-free after you reach age 59 ½.  There are also special allowances that allow penalty-free withdrawals for the purchase of your first home.  

Savings Scenario – Tax-free earnings! 

Why contribute to a Roth IRA while you are young and really not thinking about retirement?  Because you have time on your side, small investments starting at age 20 will have 45 years to grow tax-free.  

If a twenty year old contributes $125/mo to a Roth IRA, earning 7.5% interest per year compounded monthly, they will have accumulated about $514,000 at age sixty-five. If this savings plan starts at age thirty (ten years later) accumulated savings is less half, about $239,000. These calculations were made using the MSN Money's Savings Calculator , check it out and build your own saving scenario. The power of tax-free growth is very clear, when you have time on your side.  For example, your total savings (at age 65) grows another ~$84,000 if you can start your Roth IRA savings plan, two years earlier at age 18.  

Roth IRA contributions are limited to earned income; the maximum annual contribution in 2006 is $4000.  However don’t think you need to contribute $4000 to make opening a Roth IRA worthwhile, regular contributions will go a long way towards building a nice nest egg.   

Build your fortune with a regular Roth IRA savings plan and watch your money grow tax-free.

Next article – Where, when and how to set-up a Roth IRA

Consult your tax advisor regarding your unique situation prior to investing.

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