16 going on 17: roth IRA?

[Guest JimmyC]

Hey there,

I'm 16 years old, currently in highschool with a part-time job. I make aproximately $3744 a year (before taxes) from this job and want to make the best use of it for my future (specifically college). Recently, one of my coaches mentioned a roth IRA account as a tool for me to invest that money into. After doing some background research, I was left with a few questions:

-As an incoming senior to highschool, I will be filing out the FAFSA for college. Would the money i invest into the rothIRA prevent me from getting the maximum amount of financial aid availible to me?

- Do I have to report what's in my roth IRA to FAFSA?

- Is getting a roth IRA a good idea for my situation?

- If not, what's a better alternative?

- is it a good idea to invest into the roth IRA for the purpose of being able to take that money out for college later?

I'll post more questions when they pop up, any and all comments are appreciated. Thanks!!

Some more background info:

- My parents make ~45k combined annually

- First generation immigrant

- first to go to college in immediate family

- family of 4

- little to no investment by my parents into my college (they want me to go to city college--yeah, right)

- Not very likely to get a LOT of scholarships (or significant ones)

As you can see, I need to make sure I can get as many loans and aid from FAFSA as possible..

Thanks again.

[J Simmons]

Don't know about the impact of FAFSA eligibility.

Do know my high school coaches did not give advice about tax-advantaged savings.

Do suspect you are rather precocious for 16--can't imagine you won't get some scholarships--when I was 16 the questions you are asking never crossed my mind.

An education IRA or 529 might be better than a Roth if you'll need to withdraw for college.

Roth IRA would be a great idea for dollars you know you won't need to withdraw--you might not have to pay much if any taxes when it goes in, and if you leave it there until at least age 59 1/2 you'll never pay tax on the withdrawals.

[Guest JimmyC]

Don't know about the impact of FAFSA eligibility.

Do know my high school coaches did not give advice about tax-advantaged savings.

Do suspect you are rather precocious for 16--can't imagine you won't get some scholarships--when I was 16 the questions you are asking never crossed my mind.

An education IRA or 529 might be better than a Roth if you'll need to withdraw for college.

Roth IRA would be a great idea for dollars you know you won't need to withdraw--you might not have to pay much if any taxes when it goes in, and if you leave it there until at least age 59 1/2 you'll never pay tax on the withdrawals.

Thank you for your quick response!

My high school coach is a rather successful guy, he started a consulting firm and is making big bucks. He's the type of guy that knows a lot about investing and that stuff.

As for being precocious, thank you. hahaha My situation forces me to look at these things at an earlier age. I CAN'T WAIT TILL I HAVE A MORTGAGE TO PAY!

I will look into the education IRA and the 529 -- thanks again. Can I start one myself? Or would I need to have my parents do it?

[J Simmons]

You might need to give your parents the money so they can contribute it to an education IRA or a 529. Both go beyond my experience, but others on this board can likely chime in and say for sure. Good luck-but with the way you're looking into things and making plans, luck may be the last thing you need.

[david rigby]

You can look at the FAFSA form here: www.fafsa.ed.gov. Skimming, I noticed that it requests IRA contributions that affect your taxable income (or that of your parents); therefore, Roth IRA contributions are irrelevant. Also, I did not see anywhere that it requested the balance of any IRA accounts (but I was only skimming).

Be aware that the FAFSA is a high-level overview. Lots of detail it does not request. Individual colleges, or scholarship applications, may request more detail.

[masteff]

I'd encourage you to look at 529 plans, starting w/ your own state. Your state may have a state income deduction for contributions, which could reduce your or your parent's taxes as well (but it generally has to be that same state's plan to get the deduction (eg Oklahoma won't let you deduct for contributions to Illinois or elsewhere)).

The following webpage, and the site it's on, might be helpful:

http://www.savingforcollege.com/financial_...our_savings.php

One advantage of a 529 (versus a Roth IRA) is that withdrawals used for education are not added to your next year's FAFSA. So using the 529 savings for its purpose doesn't reduce what you can get later.

[Guest JimmyC]

The following webpage, and the site it's on, might be helpful:

http://www.savingforcollege.com/financial_...our_savings.php

One advantage of a 529 (versus a Roth IRA) is that withdrawals used for education are not added to your next year's FAFSA. So using the 529 savings for its purpose doesn't reduce what you can get later.

The site is very helpful, thank you.

If I withdraw the principal and earnings AFTER college (meaning I graduate) to pay for loans, would that be a better way of using the roth IRA? From what I've read, there's a new law that allows one to withdraw from the roth IRA without a penalty for educational purposes. So my question is, is it a good idea to withdraw from my rothIRA the moment i graduate from college to pay off my college loans before the interest accumulates?

Thanks for the comments everyone.

[Kimberly S]

If you are withdrawing the money to pay off loans, that probably won't qualify as an educational expense even if they are student loans.

[Guest 410b]

One thing to keep in mind when you are considering leaving or withdrawing money is one thing that you have now you will never have again-to the degree you have it now- and that is the benefit of being able to use the time value of money.

[John G]

Misc. pointers on some of the issues raised:

1. $3,400 won't go very far in meeting the cost of college, even if you choose a public in-state school. Colleges do expect students to have summer jobs, both in HS and over college summers. The financial calculations often assume a few thousand in summer earnings. While some kids go to music/computer/design camps or get involved in church/non-profit activities, the general expectation is that students make some effort to contribute some of their summer or school year earnings. At the college level, during the term, this may mean work-study jobs.

2. Don't sell your self short on getting financial aide. There are both scholarships, loans, work-study, tuition rebates, etc. Because your parents do not have the academic experiences to advise you of all the options, you need to cultivate your relationship with: teachers, counselors, your coach and potentially the folks you meet from each school. (If you think applying to college is just a paperwork exercise, you are wrong. You want to have direct personal contact with people in admissions, recruiting, and alumni.)

3. Offsprings of immigrants, first generation college student - these are very powerful attributes. Good colleges want diversity. They also recognize that you may have more desire and a willingness to work hard...compared to some of their "legacy" admissions.

4. Here is the biggest upside down that most high school students do not understand...heck most parents don't understand it either. The more expensive the school, the more money available for financial aide. Here's a homework assignment for you. Go to Princeton's website and look for their financial calculator. Fill in your stats and get a quick idea of how Princeton would calculate your financial aide package. {One of my JA economics students said after doing this....if I had only known this, I would have gotten better grades. Another kid realized it was cheaper to go to Princeton then the local branch of the State U.} The reason I suggest Princeton is that they are very up front with how they look at the financial picture. You could easily substitute Northwestern, Rice, Stanford...or any of the high end private schools. They have big endowments and don't want to populate their incoming freshman class starting with the highest income family, with teenagers going my Muffy and Skip.

5. I have been a "reader" and evaluator for many private sector scholarships. You high school office is a good place to start to look. Disney, Cargill, GM and a host of other companies offer scholarships. Some scholarships go un-assigned each year. My kids orthodontist went to DU of a 4 year full ride scholarship. Later, he encouraged one of his patients to apply to DU and shoot for the same "dentistry" scholarship. No one had met the qualifications in those intervening years - so the scholarship sat waiting for an applicant. Some scholarships are based upon writing an essay, community service is sometimes featured, or it might be leadership skills. You apply to anything that seems to be a fit and hope to snag a few. If you are a strong student, you may want to track down the "Bird" scholarships...its been a few years, but when my kids were going to school, Colorado had 90+ scholarships (4 year, $4000 per year). These may have been named after Senator Bird of West Virginia.

6. Find someone who will help review your essays and other submissions for scholarships. I've read about 4,000 essays in the past decade, and I would say about 90% are terrible. My favorite person is my grandmother (they all sound alike).... I was born in Tenn and moved to Georgia (the worn out timeline essay).... If you want to win a scholarship, you better stand out from the mediocre crowd and take some risks. In my experience, risk takers virtually always survive the first cut. Don't write an essay about something that you are not passionate about - indifferent essays can cripple your chances.

7. Entering freshman have the greatest array of scholarship opportunities. But, upper classman often win substantial awards, especially after they prove their abilities and start running out of money.

8. Did you know, life does not end with a college degree. Many fields require advanced training and a masters degree (when education gets a lot more serious). Grad students often GET PAID TO GET THEIR DEGREE. Example, my wife went back for her PhD at the age of 52. On the academic application form there was a small line that asked "would you be willing to be considered for..." (I don't remember the exact wording, but I suggested she check YES. They clearly did not say scholarship or anything that we recognized.) Checking that little box got my wife an offer for full tuition coverage for 3 years and a stipend (also known as cash).

9. Since you did ask about Roths. Sure you can open a Roth, but almost all of your funds will be gone in two years. The Roth or 529 will shelter earnings... but how much earnings do you expect in two years. Beware of any setup that has fees and charges that would eat up the tax advantages.

I think it is great that you posted your question. You have your eyes and ears open. Thats absolutely critical for the next few years. Enjoy your senior year. Do something extraordinary and then tell you favorite schools about it.

[Guest jims]

One key advantage that is often forgotten on Roth IRAs is available withdrawals. The withdrawal hierarchy is contributions first then earnings. There is no proration of contributions and earnings. You can always withdraw your contributions at any time with no taxes and no penalty. Its only the earnings that are subject to taxes and penalties if not a qualified withdrawal (at retirement). So for uncertain savers, a Roth IRA does provide accessability to money if your circumstances/intentions change.