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College Students Should Open Roth IRAs

How would you like an opportunity to turn $20,000 into more than $500,000 tax-free by the time you retire? Well, if you're a college student with a summer job, try opening a Roth IRA and waiting 45 or so years.

No matter how you cut it, the primary driver of investment returns is time. The more time you have, the greater the impact compounding has on your future. So if you're in college, one of the best things you can do to help secure your future is to fund a Roth IRA.

To fund a Roth IRA, you need earned income, such as income from a part-time summer job. In 2009, you can contribute up to $5,000 of that earned income into a Roth IRA. Once it's in the Roth IRA, it grows tax free forever.

Want to see what a difference this can make:

  • Assume you fund $5,000 into a Roth IRA while in college for each of the four years. The total contribution is $20,000.
  • Assume that money grows at 7.5 percent a year until age 65.
  • The $20,000 would grow to more than $530,000, and it would all be tax-free.
  • And if the money grew at 8.5 percent, it would be worth over $820,000.
Regardless of how fast it grows, the key is that you have about 45 years for it to grow. While you can't be sure of the future returns, the odds are pretty good they'll be somewhere between five and 10 percent over the next 45 years.

I realize it's tough to scrape up any money to save for retirement when you're young and still in school. Some people just can't do it. But if you can, you should.

I wish I had done this with some money from my summer jobs. I recall my dad mentioning something like this to me 25 years ago, but I of course thought I had a better use for the money. Not sure what I did with it, but it didn't go into an IRA. So now I have to save a bit more because I didn't follow his good advice.

It's easy to open a Roth IRA. Any one of the discount brokerage firms or mutual fund companies can help you do it in a few minutes. There are some technical earnings limits and issues for Roth IRAs, so make sure you confirm your ability to make the contribution with your tax advisor.

Bottom line. Roth IRA funding for younger workers offers an incredible opportunity. Don't let this one pass you by.

As with all financial matters, consult your individual advisor prior to making any decisions. For tax issues, make sure you consult your tax advisor to determine eligibility for a Roth contribution.

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