Money Talks, So Should You

Financial Student: The Roth IRA — your all-in-one savings account

Ryan Ayres
by Ryan Ayres, Dimespring 30 (@studentfinances)

When I first started getting my finances in order, I felt like I was being pulled in a million different directions. I wanted to set up an emergency fund. I wanted to invest. I wanted to start saving for retirement. I wanted short-term savings for a study abroad trip. I wanted everything!

It's hard to prioritize these types of things, but I knew I had to jump in and make a decision. Luckily, I found out it was possible to knock out two of those goals with just one account.

READ: How to beat the most common post-grad money mistakes

It's called the Roth IRA (Individual Retirement Account). Think of it like a bucket that can hold all sorts of investments. You can throw some stocks in there, maybe a mutual fund, a few bonds or maybe all three.

The best part of this account? You don't pay taxes on the income you take out when you retire, as long as you're 59.5 or older.

But retirement is a long time away. You're probably saying, "I don't know how I feel about locking my money away for 30+ years."

Here's where the emergency fund part comes in. The Roth IRA lets you take out any contributions tax free. The important part to remember is that while contributions (money you put in) can be taken out tax free, earnings cannot.

This means your Roth IRA can function as an emergency fund since you're free to take out what you've put in. For young adults, this is perfect. Many of us are still living with mom and dad, have no children and don't own a house, so we're not going to get stuck with an insane bill because we need a new roof. Emergencies just aren't as likely to occur for us.

READ: Tips for negotiating your first salary 

I would recommend keeping some money easily accessible in a savings account, around $500 or so. But after that's done, definitely start contributing to a Roth IRA. The younger you are, the more beneficial a Roth is. When you're in college or just starting out in the workforce, your income is probably low. That means you're paying very little (if any) income tax. Contribute some money now to a Roth and then when you actually retire later in life, it's possible you will have never paid tax on that money. Plus you've got a source of funds if an unlikely emergency pops up.

A two-for-one deal like this doesn't pop up very often, so you'd be wise to jump on it sooner rather than later.
 

Ryan Ayres is a 20-year-old college student living the Midwest. He can be found blogging at The Financial Student, where he writes about repaying student loans and starting out in the personal finance world. Ryan is a member of the Dimespring 30, a community of bloggers sharing their thoughts, experiences and perspectives on personal finance.