I write in response to Kate Patrick’s article, “Talk money to me: Get a savings account,” in the March 9 edition of the Col­legian.

Patrick said, “If you want to save for retirement effec­tively and have cash on hand in an emer­gency, open a savings account.”

I agree that a savings account is a good vehicle to stash cash for a rainy day or a near-term goal like a car or vacation.

But to save for retirement, college stu­dents have a far superior option: a Roth IRA.

A Roth IRA (indi­vidual retirement account) has two huge advan­tages. One, the money can only be with­drawn with a penalty, elim­i­nating the temp­tation to cheat.

Two, for college stu­dents, the money will be saved com­pletely tax-free. In theory, con­tri­bu­tions to a Roth IRA are taxable, but if you are in the 0 percent tax bracket, as stu­dents are, you con­tribute without paying tax. Earnings in the account grow without being taxed. Money with­drawn in retirement has never been taxed at all, an enormous advantage.

Then there is the hidden benefit: all those years of com­pound earnings. Con­tribute annually in your youth, and the money will com­pound to a stag­gering amount by the time you are ready to pull it out. Bring up one of those com­pound interest cal­cu­lators on your phone and play around with some numbers. You’ll see what I mean.

One pos­sible obstacle is the minimum investment some insti­tu­tions require to open the account. But shop around: TD Amer­i­trade offers a no minimum, no com­mission Roth IRA. Invest in the Van­guard Total Stock Market Index ETF through your TD Amer­i­trade account, and your expenses will be razor thin. You are investing for the very long term – it’s probably 45 years until you retire. So a stock market index fund will serve you well.

You’ll thank me later.



Barbara Watson

  • disqus_odKVC5cL1k

    Remember to con­tribute to an IRA, you have to have earned income. Oth­erwise good advice.