We as college students tend to worry about our immediate financial future rather than looking at the long term. I guess RPI tends to guide us that way, taking huge sums of money away from each of us every semester. However, investments in the stock market and individual retirement accounts can become huge financial resources for the future if started now.
If you don’t understand the concept of an IRA, here’s a quick overview. There are two types of IRAs: the traditional and the Roth.
A traditional IRA is tax-deferred. This means that the saver does not pay taxes on the income placed in a traditional IRA until it is removed. Money in the IRA is invested in stocks, bonds, money market accounts, etc.—whatever the individual investor chooses.
Investors cannot touch the money in traditional IRAs until they are 59 1/2 or else they will pay tax on the money removed plus a 10 percent penalty. When the money is withdrawn normally, it is taxed at the investor’s income level the year of removal. There are income limits on this type of fund, as well as a yearly contribution maximum of $2,000. Now let’s take a look at the Roth.
The Roth IRA works nearly the same way as a traditional IRA. The main difference is money deposited in a Roth IRA comes from your after-tax income.
The real benefit comes when you make gains on the money; the gains are not taxed. Therefore, if you make one million dollars in your Roth IRA, you take home the entire sum. In the traditional IRA, the money is taxed when you take it out.
Money in a Roth IRA can be used for higher education expenses, tax- and penalty-free, as well as for first home purchases. If the money is withdrawn before age 59 1/2 there is no penalty; the investor only pays the tax on the gains.
There is a five-year waiting period on withdrawing the money, so opening an account early, with as little as $100, starts you on your way to a secure financial future.
The most valuable thing to an investor is time. Higher risk investing is possible because time allows for the temporary ups and downs to level out.
A financial planner and advisor at any stage in your life is a great help. Professionals at traditional investment firms as well as online investment sites can help you set up a financial plan for the future. The amount you invest is irrelevant; it is just important that you get a feel for how to make your money work for you.
Now seems to be the perfect time to invest, as many great stocks seem to be undervalued. Next time you visit your favorite portal site, follow the link to the financials page and look at some big company stocks.
Take a peek at what’s available so large rewards can be reaped in the future.
