I'm 19, in college, and I want to start saving in a Roth IRA. Can I do it?

[theamericanss]

Good evening all,

I'm 19, a full-time student, and a delivery driver. As a student on scholarship money, I get fairly large refund payments back from the University. I also have a structured settlement from a dog attack that I get large payments back for. On the advice of my uncle, who has been dealing with money for many years, I opened an investment account with Ally to invest my money into mutual funds and good paying dividend stocks. I have a long-term savings account set up with Ally as well to save with a good interest rate.

I have a checking account and a savings account with a local bank that I use for day-to-day operations, and I use this savings account as my emergency fund due to the liquidity of the money in it. I can move funds to my checking account instantly in times of need.

So it sorta looks like this:

Checking - Local Bank

Short-Term Savings (Emergency Fund) - Local Bank

Investments - Ally

Long-Term Savings - Ally

Now as my life is starting to stable out, I'd like to set up an retirement savings plan so that I can just put money away and let it grow. My uncle recommends an IRA with Ally since my investments are with Ally and my long-term savings account is with them. My question is, how should I proceed? Should I even worry about this at this time in my life? What are the limits to a Roth IRA and can I even legally contribute to it at this point?

I appreciate any input.

[ET]

I’m on the other end of the spectrum! I’m 62 yo and want to start an IRA myself! I have checking, a savings account for emergencies - about 3000.00. I put 26% of my salary in my retirement account with Wells Fargo. I want to start putting some money aside (about 200 per month) into an IRA because I will not have to pay tax on that money when I withdraw it. I think diversification is a good thing, and I am very impressed that you are thinking about this at this time of your life! Nowadays people are living up to twenty years after their retirement, and many people are not setting aside what they will need to cushion their retirement. I give props to you for looking at the long term rather than what is the now. I think if you feel the company you are using is earning a reasonable rate of return (8-10%) stick with them, if not, shop around. Just stay the course! Don’t let other people talk you out of planning for your future- what you are doing is a smart move.

[CourtneyA]

Hi @theamericanss! Thanks for writing in.

First of all, let me say how awesome it is that you're thinking about your financial future so intentionally at age 19. This discipline and diversification will surely serve you well in years to come.

It sounds like you already have an emergency fund in your high interest savings account which can cover a few months of living expenses in case of job loss, which is great. If you'd like to start saving for retirement, a Roth IRA allows you to contribute money now, allow it to grow, and withdraw it tax-free in retirement. 

While many people your age aren't even thinking about retirement, that doesn't mean it's a bad idea - in fact, it's the opposite. The earlier you start investing, the more the power of compound interest will work in your favor. If you have the extra cash flow and are in a good spot for your near term financial needs, it's never too early to start thinking about retirement. 

For 2019, you can contribute up to $6,000 per year, assuming you've earned at least that much in taxable income. There are income limits to Roth IRAs - for 2019, you can only contribute if you've earned under $122,000 annually (modified adjusted gross income). (If your income exceeds the threshold amount now or at any point in the future, you can still keep the account, just not contribute in that tax year.) Otherwise, opening an IRA is a relatively straightforward process.

Let us know if you have any specific questions! Have a great day 🙂 

[theamericanss]

So basically, I can contribute up to the amount I make each year. I started my job in August of 2018 and finished the year with a AGI of $5,481. I expect this to be double this year after working a full year. So is it acceptable to open my IRA right now or should I wait until the end of the year?

I appreciate the support.

[nynj2me]

You don't need to wait- the earlier you start, the more your money will grow.  Your statement about contributing as much as you earn is correct, but don't go by your adjusted gross income- because that can include money that is from investments, not wages or self-employment.  Go by what is on your W2- under Social Security wages-it will be more accurate.  And, you can contribute to 2018 if you haven't done your 2018 taxes yet- you have until April 15th, 2019 to contribute to 2018's IRA.  Check out Vanguard funds.  Very low fees, some funds with very low entry points- and you can do automatic funding on a schedule you set up- right from your checking account.  I had both my kids do Roth Ira's as soon as they started working, although I helped them in the beginning.