Roth IRA for Students

Question

I'm currently a graduate student who does not work aside from fellowship duties like TA-ing, grading, and such. My approximate income, therefore, is around $18k per year, minus around $2k for school-based fees. I have not deducted rent, food, etc, in an attempt to allow this question to be slightly more general (for the general grad student crowd, at least!) but my situation is around $650 for housing, no car costs, and no outstanding student loans.

Main Question: What are the perks, tax-wise, of investing in a Roth IRA right now? Should one's income verses expenses be above a certain level in order to begin investing in a Roth? Is there an approximate age that one should open a Roth?

(I have checked around the internet, and many of the sources are polarized in "invest early, invest often" and "wait until you have enough, then slow and steady" camps. I am interested in seeing what the contributers to this forum have to offer!)

Answer 1

There are no immediate tax-related benefits to putting money into a Roth IRA. You are investing after-tax money in the hope that the rules won't change and you'll be able to take out the money tax-free when you retire.

Under current rules, you can take out your contributions at any time without penalties or taxes. You can't take out earnings without penalties until you retire.

You said you don't have any debt (great!). So if you have cash that you don't have other uses for, and you don't mind possibly tying it up for a long time, you can put money into a Roth IRA.

I'd argue that if you have, say, $25-50/month to put into long term savings, it's a good habit to start. When you move into a job that gives you more disposable income, you can increase this amount. The earlier you start, the lower the monthly amount you'll need to contribute towards a comfortable retirement. Once you get started putting a little bit away, you'll never miss it.

Answer 2

The Roth is the mirror image of the Pre-Tax (traditional) IRA. The latter gives you a tax break now, the deposits go in pre-tax, and are withdrawn at your rate in retirement. The former lets you squirrel that money away now, post-tax, but never pay tax again.

For young folk the Roth is a great way to go. My 12 year old has a Roth account, and paid no tax since she has her own exemption. At your level, you are probably in the 10% bracket now. Imagine investing that money and at retirement finding it's grown 100X (very possible), if it were in a Roth, you'd have no tax due.

As BST noted, you are always free to withdraw the deposit, so if you decide this wasn't money you could actually put away long term you still have an out.