Put that grad cash to work: Open an IRA
If you’re a high school graduate, you’re probably starting your next chapter with some extra cash, thanks to generous friends and family.
More than half of those who buy gifts for graduates give a little extra green to help bulk up savings, according to the National Retail Federation’s Graduation Spending Survey.
Before stashing that cash in a lower-interest savings account, find out whether you’re eligible to put your monetary gifts to work in an Individual Retirement Account from Dupaco Community Credit Union.
“There’s a misconception that young people don’t need to start saving for retirement yet because it seems so far away,” says Lynn Schmitt, Dupaco’s IRA Coordinator. “Saving for retirement sooner rather than later is really important.”
Schmitt says IRAs offer several benefits not available with regular savings accounts:
- Savers tax credit (Roth and Traditional, if eligible)
- Tax-deferred earnings (Roth and Traditional)
- Tax-free earnings (for qualified Roth distributions)
- Tax deduction for contributions (Traditional, if eligible)
At Dupaco, eligible individuals can open an IRA as soon as they are 18.
Not only will you have more time to save by starting early, but you’ll also have compounding interest working in your favor, Schmitt says. Compounding interest is when interest earned on the principal adds into the IRA balance, which then also earns interest going forward.
“As the principal grows, the more interest you earn – so the longer you have the money in there, the better,” Schmitt says.
This example illustrates Schmitt’s point:
If you make $2,000 contributions for eight years starting at age 19 and your friend waits until age 27 to contribute $2,000 annually through age 65, the total contribution for your friend will be $78,000 compared to your $16,000. But the final total will be $805,000 for your friend compared to $1,019,000 for you, assuming a 10-percent compound total return.
Schmitt recommends talking to your tax advisor to find out which type of IRA is best for you. A free Dupaco Money Makeover can help you create a budget and determine how much you can afford to put into an IRA. A small amount is better than nothing, Schmitt says, and Dupaco offers several options to automatically deposit your contributions.
“Budgeting will also help avoid withdrawing funds from the IRA, which could result in potential tax and penalty consequences,” Schmitt says. “As you are able to, increase the amount of your automatic contribution.”
* IRA contributions are subject to eligibility.