How to Open a Roth IRA as a College Student

by Jalen & Sarah Bromley
Opening a Roth IRA

Most people don’t start thinking about retirement and savings until they start working full-time — and some wait even longer. But there’s no reason to wait! Opening a Roth IRA in college is one of the most effective ways to grow your funds and enjoy juicy tax-free withdrawals in your later years.

This article will cover what a Roth IRA is, the benefits of this account type, how to open one as a college student, and what to consider along the way.

What is a Roth IRA?

There’s often confusion about IRAs and Roth IRAs. Both options are retirement accounts that allow account owners to benefit from tax incentives. However, these tax advantages involve different mechanisms.

With a traditional IRA, contributions are tax-deductible (for both state and federal taxes). Effectively, you’ll be contributing pre-tax dollars. Once your retirement rolls around and you want to withdraw your money, it will be subject to taxation.

The reverse is true for Roth IRAs. You’ll contribute to the account with after-tax dollars (meaning you pay tax and then add the money to your account after). But you won’t have to pay tax once you withdraw funds in retirement.

Benefits of Roth IRAs

Choosing the right tax-advantaged account for your needs largely comes down to whether you expect to be in a higher tax bracket when you contribute to your plan or when you need to withdraw from your plan.  Here are the main benefits of a Roth IRA.

Tax-free withdrawals

At first, you might expect to be in a lower tax bracket when you retire. Many assume they won’t save as much money to pay themselves a salary equivalent to what they earn now. But if you start saving into your account early, this may not be the case, thanks to the magic of compounding interest.

In other words, when you put money into a retirement account, not only will that lump sum grow over time (due to investment returns), but all the returns you make will also start to make returns. 

Also, as a student, you’re most likely currently paying a low tax rate. This means a Roth IRA probably makes more sense for you than a traditional IRA.

Tax-free growth

Since withdrawals from a Roth IRA are free from taxes, you get to withdraw all that money tax-free at a later date. Considering the long timeframe you’re investing over if you open an account as a college student, you can expect your plan to grow significantly.

Another advantage of Roth IRAs is their flexibility. For one, there is no required lifetime minimum distribution (traditional IRAs require you to take out a minimum amount starting from a certain age).

Since you don’t need to worry about taxes, you won’t lose anything by withdrawing a huge chunk of money one year and absolutely nothing the next year. Taking the same approach with a traditional IRA would be tax-inefficient.

Should students open Roth IRAs?

Despite the clear advantages of opening a Roth IRA, many people are reluctant to create an account early in their lives—especially when they’re still college students. It’s not a time when most people have spare money to throw around!

The problem with this is that when it comes to investing, starting earlier makes everything easier.

The early advantage

We all know that opening a savings account earlier will give us more time to save money, helping us save more. But it’s hard for the human brain to comprehend how big a difference starting early makes due to compound interest. 

Incredibly, starting to consistently save and invest money a few years earlier can result in you earning double the amount of someone who starts later—even if the person who starts later only contributes a similar amount overall.

How to open a Roth IRA as a college student

If we’ve convinced you that a Roth IRA is the way forward, here’s how you can open one.

Choose a provider

The good news is that most financial institutions offer Roth IRAs, so you’ll have plenty of choice over who to open your account with. Banks and brokerage firms are the big ones to look for.

When weighing up your options, the main factors to consider include:

  • Fees. Including maintenance fees and costs of executing trades. Look for accounts that charge less than 0.5% to manage funds.
  • Account minimums. Some accounts require a minimum balance to open an account .
  • Investment options. Some providers let you handpick your own investments from assets like ETFs, stocks, and bonds. Others actively manage funds for you or offer target-date funds.
  • Additional features. Some providers also offer additional features, such as calculators or mobile apps.
  • Customer service. Some providers are online-only, while others may have branches. Check whether customer service is offered via online chat, telephone, or other means.

If you don’t know much about investing, you may want to opt for a diversified fund (which includes a range of assets already picked for you) instead of handpicking assets to invest in. You don’t need to beat the market, you just need to match it — the S&P 500 has achieved an average return of more than 10% over the past 100 years.

To make things even safer, most providers can offer you a fund specially designed for those who want to minimize their risk by adding safer assets like bonds. If you’re unsure, you can also schedule an appointment with a financial advisor. 

Fill out your application

Opening a Roth IRA is simple enough. You can usually complete your entire application online.

More good news is that practically any American can open a Roth IRA. There’s no minimum age, but you must have earned income in the year you contribute.

You’ll need the following documents:

  • A taxpayer identification (SSN or TIN)
  • A driver’s license or another identification 
  • Account number for the account you’ll be using to transfer money
  • Name and address of employer
  • Details of the beneficiary for your plan (who will get the money if you pass away)

The last point might seem a little morbid, but it’s important not to miss it.

You’ll also need to complete Form 5305-R for the IRS, a dedicated form for the account.

And that’s pretty much it! If you run into any difficulties, you should be able to contact the account provider for help.

Make contributions

There’s no point in opening a Roth IRA account if you won’t be making contributions. 

For most people, the annual contribution limit for a Roth IRA is $7,000 (which increased from $6,500 for the 2024 tax year)

Those aged 50 and older can contribute an extra $1,000 a year to their Roth IRA.

Consider setting up automatic contributions to ensure you make the most of your Roth IRA, and don’t forget to contribute. This means you will ask your bank to automatically send payments to the Roth IRA every month or on another schedule. 

Many people advise doing this so the payments leave your account at the start of the month, meaning you “pay yourself first” before other spending and force yourself to make saving a priority.

However, realistically, things can be tight as a student. Make sure you set up an emergency fund and work out a sustainable budget before trying to max out your Roth IRA with money you don’t have. An alternative to monthly contributions is to deposit whatever you have by the end of the tax year.

Monitor performance

If you’re a relatively confident investor, you may want to make some necessary adjustments to your portfolio along the way.

This is less relevant for people who are investing in actively managed funds (meaning someone else is investing on your behalf) or target date funds (meaning that funds are automatically adjusted as you approach your retirement date).

But if you’re handpicking your own investments, you may want to monitor performance over time so you can rebalance your portfolio appropriately. 

Withdraw the money

Fast-forward a few decades, and you’ll finally be able to withdraw money from your account. Currently, once you’re 59 ½ years old and have had a Roth IRA for at least five years, you can start withdrawing the funds.

Realistically, if you’re in college now, there’s a good chance this age could change by the time your retirement rolls around.

If you want to withdraw your money before this point, you can, but you’ll face penalties — which we’ll get to shortly.

Other considerations when opening a Roth IRA

Reading the fine print is essential when it comes to retirement accounts like the Roth IRA. Here are some additional considerations to keep in mind.

Early withdrawal penalties 

Technically, you can withdraw your money from a Roth IRA at any point — but doing so will incur penalties if you don’t meet the criteria outlined earlier. Instead, you’ll face a 10% penalty, and you may also have to pay tax on your withdrawals.

There are some exceptions. “Non-qualified distributions” are cases where you can take money out early and avoid penalties. These include qualified disaster recovery, qualified educational expenses, and medical insurance premiums after losing a job. 

Minimum and maximum income

Although you must have earned income to contribute to a Roth IRA, there’s no minimum amount.

Forms of earned income can include:

  • Scholarships or fellowships
  • Non-qualified stock options 
  • Income from a spouse 
  • Untaxed combat pay
  • Income as a 1099 contractor 
  • Income from a business or farm
  • Taxed alimony
  • Commission
  • Tips

Interest, dividends, pensions, and social security don’t count as earned income.

There is a higher income limit, however, For the tax year 2024, single filers earning more than $161,000 and joint filers earning more than $240,000 can’t contribute to a Roth IRA. The contribution limits also start to decrease for single filers who earn more than $146,000 and joint filers who earn more than $230,000.

Set yourself up for the future 

A Roth IRA is one of the best ways to save, thanks to the chance to benefit from tax-free growth and contributions. And the earlier you start contributing, the longer it will have to grow — meaning that opening an account in college is the perfect way to set yourself up for the future.

For more advice on managing your finances as a student, keep up with Frugal Student. Even if you’re not quite at the point of retirement saving yet, we also have plenty of articles covering the basics, like budgeting and student loans.

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