Updated April 15th, 2024
Key Takeaways
- Compounding interest can be a powerful force for investors who start as early as college.
- There are many benefits to investing in an individual retirement account (IRA), including significant tax advantages.
- With Alto, you can get started investing in your financial future with an Alto Crypto IRA® and / or an Alto 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.” Despite the totally fair, natural reaction, 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 is investing in college 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 by the law of exponential increase, the more money you’ll have in the future, even with the same principal.
To demonstrate the power of compounding interest, let’s look at an example:
| Susan (Early Investor) | Tom (Slow Poke) | |
| Monthly Investment | $100 | $1,000 |
| Time in Market | 40 Years | 10 Years |
| Annual Interest Rate For the purpose of illustration. Actual results vary. | 12% | 12% |
| Compound Frequency | Monthly | Monthly |
| Total Savings | $1,176,477 | $230,039 |
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.
What are the potential benefits of investing in an IRA as a college student?
The benefits of investing in an IRA as a college student are plentiful. You get an early start on investing, which means you learn from a younger age. The longer you learn, the more you know and the more informed your investment decisions become over time.
But the biggest benefit to investing in an IRA is compounding interest. The longer your money is invested, the more interest it accrues over time. So you have the potential to make more money not just from increased capital over time, but also from compounding interest.
There are also significant tax advantages to investing in an IRA, although this doesn’t only pertain to college students. 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 college investors who have limited income.
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 like college students who may 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).
Why is a self-directed IRA worth considering?
There are many conventional IRA investment platforms to choose from. Many choose index funds or target-date funds that automatically adjust stock/bond allocations based on a person’s unique risk profile. 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 bottom line
Ready to start investing in the things you’re passionate about? Click here to set up a Traditional or Roth 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.