Summer Jobs: A Great Opportunity to Jumpstart Retirement Savings
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As the school year ends, many students will go out and find employment for the summer. In addition to the obvious benefit of earning some extra money, these early working experiences also provide a great opportunity for them to learn about saving, investing and retirement planning.
Any individual who earns income (up to set maximum limits) qualifies to establish a Roth IRA which allows him or her to contribute up to $6,000 into an account which will then grow tax-deferred and be eligible for tax-free withdrawals after the age of 59 ½. Though the contributions are not tax-deductible, this doesn’t tend to be a major issue for most student workers as their total earnings typically only have them paying minimal to no taxes, so a tax deduction doesn’t provide any meaningful benefit.
While these initial, potentially smaller contributions may not seem much at the time, the results can be quite impressive. If a working student were to contribute $2,000 a year to a Roth IRA for four consecutive years, assuming a 7% average annual rate of return, that $8,000 total investment would grow to over $60,000 at the time of her potential retirement. The numbers only look better if that same student continues to make contributions when she enters the “real” workforce after graduation.
Of course, many students enjoy spending the money they earn over the summer and at the end of the year don’t have any extra funds to make Roth contributions. In these instances, parents can help supplement or match their child’s earnings so that they have spending cash but still have funds available with which to make a contribution.
No matter what the amount contributed though, the opportunity for a young adults to establish an account, research investment options and learn more about retirement planning can provide incredibly valuable lessons that will benefit them through the rest of their lives.