Retirement planning is something many people avoid, thinking it’s too hard or takes too much out of your paycheck. That’s not the case. In fact, opening an IRA can easy, quick, and extremely beneficial to your finances.
College students who work may sometimes have a job that offers a 401(k) with a match. It’s easy to sign up and even easier to contribute. If you’re in this category, please consider yourself fortunate, as your employer has made it easier for you to save for the future.
Does that mean you should wait until after you graduate before you get started? I don’t think so, as it generally accepted that the sooner you start the better compound interest will treat you.
Having an Individual retirement fund (IRA) can help get started and when you get a job after graduation, supplement your retirement strategy.
There are many excuses that people make, but the truth is IRAs are doable.
Common excuses for not opening an IRA (and why they are wrong)
Excuse # 1: It’s very complicated to start an IRA.
Banks, brokerages, and credit unions offer IRAs. There a wealth of options. The good news you can compare and see who offers the best deal. Some charge a flat fee for the year, some take a fee for each transaction made, others can take a percentage, and some do all of this. The idea is to keep your fees as low as possible and get the best performance. After all, you’re a college student with a limited amount of cash. Once you find a company that offers you what you want, you fill out an application to open an account. It’s not that complicated. It took me about 10 minutes to fill mine out.
Excuse #2: I need a lot of money to start an IRA.
Not true, there are companies that offer funds for $250 or less to get started. American Funds, for one, has no minimums on some of their funds if you automatically deposit into the account.
Excuse # 3: My paycheck will be sucked dry by my retirement contributions.
If you have your contribution automatically deducted from your banking account, you can catch a break on the minimum. Some offer $50 monthly minimums. That’s just $12.50 a week! (By all means, if you can put more in, then do so.)
Excuse #4: I have to be a financial genius to pick the right retirement portfolio.
Front-load, back-loads, expense ratios, and other terminology seem complicated. It’s not really once you get familiar with the terms. Wikipedia and Fool.com can guide you when you come across something unfamiliar.
Front load is the percentage you pay when you first buy the mutual fund. Back load is when you sell it off. Expense ratios is how much you’re charged for having this fund. It pays for the paperwork mailed out, salaries, etc.
How to Start an IRA
Where can you open an IRA?
- E-Trade (Annual fee and minimum are waived when you sign up for electronic statements)
- Vanguard (Some funds require $3,000 minimum)
- T. Rowe Price
- Charles Schwab ($1,000 minimum is waived if you direct deposit $100/month)
- Sharebuilder (No minimum to open; no admin annual fee)
- Zecco( No minimum to open; $30 annual fee)
What is a good option for IRA investments?
If you don’t have a lot of money to invest with right now, look at index funds. These are mutual funds that track a market index such as the S&P 500. Since management of these funds are generally automated, so they usually have low expense ratios.
Why open a Roth IRA?
Ramit Sethi succinctly give the benefits of Roth IRAs:
When you make money every year, you have to pay taxes on it. With a Roth, you take this after-tax money, invest it, and pay no taxeswhen you withdraw it. If Roth IRAs had been around in 1970 and you’d invested $10,000 in Southwest Airlines, you’d only have had to pay taxes on the initial $10,000 income. When you withdrew the money 30 years later, you wouldn’t have had to pay any taxes on it. Oh, and by the way, your $10,000 would have turned into $10 million.
Think about it.
You pay taxes on the initial amount, but not the earnings. And over 30 years, that is a stunningly good deal.
Since you’re just starting out, you’re more likely to be in a lower tax bracket now han when you retire. It would make sense to put money in and get taxed att he lower rate now.
Starting an Individual Retirement Account: Resources on the Web
There are a lot of realy good articles if you want to learn more. Here’s are some of my favorites.
- Which IRA is the Best Deal? (Get Rich Slowly)
- Save Now, Retire Rich (Free Money Finance)
- How Much Money Do You Need For Retirement? (The Simple Dollar)
- Determine your Retirement Needs in 3 Easy Steps (Moolanomy)
Photo Credit: PPDigital
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