The College Student's Guide to Roth IRAs: How to Retire Early on Minimum Wage

 I'd like to clear up a common misconception among young adults: that investing is only for those with large paychecks, and with loads of money to spare. Investing is simply not just for the wealthy. Today, we live in a world where there is a significant opportunity to build wealth, and only setting aside $100 dollars a month in a Roth IRA could mean the difference between retirement or being broke. 

What is Roth IRA?

In simple terms, Roth IRA is an investment account that requires earned income, commonly through an employer. It is a special type of individual retirement account where you invest money you’ve already paid taxes on, which allows your future earnings to grow entirely tax-free. If you're wondering how it is better than a personal investment account, it is completely because of taxes. Let me explain. In a Traditional retirement account, you don't pay taxes on the deposits initially, which seems great, but it isn't. When the time to retire comes around, and you need to withdraw your money, all your earnings are taxed. Roth IRA on the other hand, is the opposite. Your initial deposits are indeed taxed, but your earnings are completely tax free. 

-How to take advantage-

For you to fully take advantage of all the benefits Roth IRA offers, the most important thing is to invest at a young age, to allow the magic of compound interest to start working. Let me illustrate this point through two different scenarios: 

Scenario 1: A 35 year old begins to invest $100 a month into his Roth IRA account, and decides to retire at 65. He ends up taking out $197,392.

Scenario 2: A 20 year old begins to invest $100 a month into his Roth IRA account, and does that until retirement, in this case, at 65. He ends up taking out $862,685.

The only difference in these two cases is the age that they started to deposit $100 a month into their accounts, and because of that, the comparison in their retirement fund was astronomically different. There is a huge "cost of waiting", I like to call it, as you are essentially depriving yourself of money by saving it elsewhere. Remember, the true compounding needs time in order to get the best results.

There is one hurdle that you must get over before you deposit money into a Roth IRA account: the "Earned Income" rule. The IRS dictates that you can only contribute money to a Roth IRA if you actually made that money working a legitimate job. This means cash from an allowance, birthday cards, or investment gains from crypto doesn't count. However, the definition of "Earned Income" is broader than most people think. If you have a partime job or side hustle, that income qualifies. Whether that be Doordash, freelancing, or a W-2 job.

-Setting it on Autopilot-

To minimize the amount of friction between you and the Roth IRA account, I would highly recommend setting up automatic payments. You can directly link your Roth IRA account to your paycheck, like any other bill you would pay. Except, this "bill" will compound and give you thousands of dollars in return.

No matter your age, as long as you are making income, I urge you to take the steps necessary to open a Roth IRA account as soon as your circumstances permit. If you are deciding to invest in Roth IRA after reading this article, I would pay attention to this warning. When you start depositing money into the investment account, make sure you actually buy the stocks/index funds so your cash isn't just sitting idly.  

The gold standard for young investors is the S&P 500, which allows you to buy a tiny slice of America's 500 largest and most profitable companies—think Apple, Amazon, and Microsoft—all in a single purchase. Instead of betting your financial future on one company succeeding, you are betting on the overall growth of the entire economy. Over the long term, the S&P 500 has historically delivered an average annual return of around 10%. This eliminates huge risks that come from focusing on a single company, and instead targeting the overall market. 

One nice thing about Roth IRA is that you can actually take out money whenever you need, however, I would approach this with extreme caution. If you decide to withdraw part of your investment, you are limiting the amount of compound interest you can earn. So, only take out money from your Roth IRA if it is a dire situation or emergency.

The biggest mistake you can make after reading this guide is doing nothing. When it comes to building generational wealth, the date you start investing matters drastically more than the amount of money you start with. Opening a Roth IRA takes less than ten minutes on your phone through major, fee-free brokerages like Fidelity, Vanguard, or Charles Schwab. If you decide to skip 1 takeout meal a month, and instead place that cash into your Roth IRA, you will turn around in 45 years and likely have thousands of dollars behind you. Skip the hesitation, open the account, and let time do the rest.