With around 16 million college students starting or returning to campus (or virtual campus) this fall, we’re bringing you the benefits of investing for college students. Specifically, the benefits of investing in an IRA.
We can probably guess what you’re thinking-“With my busy semester, I have no time to think about investing, let alone coming up with the money to start.” We’re here to help you explore the benefits of investing early and how setting aside just a small portion of your part-time job’s paycheck can have a massive impact on your future.
Why Investing in College Is Important
The importance of investing for college students comes down to one simple principle: The power of compounding interest. The earlier you start investing, the longer your investments will grow, meaning you won’t have to put away as much to hit your goals in the future.
To demonstrate the power of compounding interest, let’s look at an example:
|Susan (Early Investor)||Tom (Slow Poke)|
|Time in Market||40 Years||10 Years|
|Annual Interest Rate
For the purpose of illustration. Actual results vary.
As you can see, 30 years can make a significant difference in total savings. Susan, who ultimately contributed less than half of what Tom did, came out with over five times the amount of total savings as Tom simply because she started investing early.
It can be tempting to think, “I don’t have much to invest. Will it really matter if I do?” You should know that you don’t need to max out your IRA every year to make a big difference for the future. In fact, as a young person, you have one of the most valuable assets-time. And by investing consistently (or dollar-cost averaging), you’re using that time to your advantage.
The Benefits of Investing in an IRA as a College Student
There are many benefits to investing in an individual retirement account (IRA). Namely, significant tax advantages. Traditional and Roth IRAs have distinct features, so let’s compare and contrast the two to help you decide which is the right fit for you.
Traditional IRA Benefits
A traditional IRA is a pre-tax account, which ultimately allows you to contribute more upfront. However, unlike a 401(k) which is configured to come out of your paycheck pre-tax, you can contribute to a traditional IRA with post-tax money and potentially seek a write-off when you file your taxes.
This is why it can be a great choice for college students with limited funds. It is important to be aware though that distributions taken from traditional IRAs are taxed, so when you cash in on your retirement, you’ll have to pay the taxes then.
A traditional IRA can be a great choice for investors who:
- Have limited income to invest but want to put aside as much as they can now
- Anticipate being in a lower tax bracket when distributions are taken
- Want to show less taxable income for the current tax year
- Aren’t eligible to contribute to a Roth IRA
Roth IRA Benefits
Unlike the traditional IRA, contributions made to a Roth IRA are funded with after-tax funds. When you contribute using a Roth IRA, you will pay the taxes upfront, but later when you withdraw your funds the distributions will not be taxed (assuming you wait until you’re 59-1/2 to and have held your Roth IRA for at least five years).
There are many benefits to a Roth IRA, making them great for people who:
- Expect their investments to grow considerably
- Never want to pay taxes on their investments
- Believe income taxes will be higher when eligible to take distributions
- Anticipate being in a higher tax bracket when they go to take distributions
- Don’t want to begin taking distributions at age 72
- Want to take advantage of the years they are eligible to contribute to a Roth IRA (since the opportunity goes away after a certain income)
IRA Contribution Limits
It’s important to note that while the IRA contribution limit is $6,000 for the 2022 tax year ($7,000 if you’re 50 or older), your contribution limit is your taxable compensation for the year.
For example, if you worked part-time at the campus bookstore and made $1,000 and earned another $2,000 working at Chipotle in 2022, your IRA contribution limit would be $3,000, not the normal $6,000 max. No matter how many IRAs you have, the IRA contribution limit is the same across all accounts.
Why a Self-Directed IRA May Be Right for You
There are many conventional IRA investment platforms to choose from. When you open an account and put money in, be sure to actually invest your funds into something. Many choose index funds or target-date funds that automatically adjust stock/bond allocations based on a person’s unique risk profile. For example, an investor who chooses a 2064 target date retirement fund will have a riskier allocation than someone with a 2024 target date retirement fund.
But stocks and bonds aren’t all you can invest in with an IRA. Many are increasingly choosing to invest in alternative assets they believe in, such as fine art, real estate, crypto, and more, with a self-directed IRA. The difference between conventional and self-directed IRAs is that you’re in the driver’s seat when it comes to your investments. The main benefits of investing in alternative assets with a self-directed IRA include:
- Reduced exposure to public market volatility
- The potential for outsized returns
- The opportunity to invest how professionals and the ultra-wealthy often do
Investing in alternative investments involves risks, including risk of loss. Do not invest without doing your research.
How to Set Up a Traditional or Roth IRA With Alto
Ready to start investing in the things you’re passionate about? Click here to follow some quick and easy steps to set up a self-directed IRA with Alto. When you do, you’ll be given the choice to invest in two ways:
- Alto Crypto IRA® lets you buy and sell 200+ crypto assets-including Bitcoin, Ethereum, Solana, and Cardano-tax-free or tax-deferred through Coinbase integration.
- Alto IRA enables you to invest in a variety of private asset classes like venture capital, real estate, and art through our wide variety of investment platform partners.
You have to be 18 years of age or older to open an Alto IRA account. Contact us with any questions you may have while setting up your account. Alright, off to class with you. Cheers to a fulfilling semester and a bright future!
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