<p>To start off: I would like to apologize for this thread not being directly related to any financial aid or scholarship topics. But I do think this is an important topic for all college students. </p>
<p>That being said, now that I have a co-op and little money coming in I want to start thinking about saving some money. I have heard about Roth-IRA and savings accounts. From what I've heard from people for savings account, I'll have to give up whatever I make in interest at the end of the year when I file for taxes. On the other hand, if I get a Roth-IRA account, I can get way without paying taxes when my money grows. How true is that? Is there any other option where I can make good interest on my investment, but still won't have to give up whatever interest I accrue at the end of the year?</p>
<p>I am not a financial advisor. But really, you are talking about two different things. In my opinion, a Roth, or any other type of retirement account, should be viewed as a LONG term investment. It is money you are putting away for your golden years. It is wise to start such an account as young an age as possible. Remember, you can only contribute as much as you earn.</p>
<p>A savings account can be long term, but usually these are more liquid. In other words, you put money in and you take money out as needed. This is NOT what you should be doing with your retirement savings!</p>
<p>Another consideration…a regular savings is likely to net you a very minuscule amount in interest…VERY miniscule! We have a good amount in various savings accounts, and NONE even generated enough interest for us to receive a 1098I from the banks! They each earned less than $10 in interest. </p>
<p>It depends on how much money you’re talking about.</p>
<p>Here’s what I would tell my kids. Financial planners will tell you that you need an emergency fund to weather unexpected expenses or a period of unemployment. The advice on how much that fund should be will vary. I’m conservative with money and I would say 1 years living expenses should be in readily available investments. That would be in a bank money market account for example, maybe part of it in short term(6 mo. or less) CDs. If you don’t find a job immediately after graduation or have a period of unemployment afterwards, this money is to get you through that. Shop around for interest rates. While rates are very low now, community banks or credit unions often pay better interest than the large banks. No, you don’t pay all the interest in taxes. Depending on your income, maybe 10-15% of the interest.</p>
<p>If you can get your emergency fund built up while in college, when you get a job after graduating you’ll be in a better position to fully contribute to a 401k and get the company match and to look at Roth IRAs as well. 21-22 is plenty young to start investing for retirement. With a Roth you don’t pay tax on the earnings, but you also don’t get to deduct the contributions from income as you make them. There are a few specific exceptions but generally you can’t take money out of a Roth until you are 59 1/2 years old without paying tax and a steep penalty.</p>
<p>How is your college being funded? Many have to use co-op earnings to help pay for college. Also, if you took out any loans for college, paying them off is a good idea because they are accumulating more interest than you can get in a conservative investment.</p>
<p>If you put your money into a Roth IRA there are penalties assessed if you withdraw it before retirement. Google is your friend on these kinds of decisions. You can find any number of web sites out there with recommendations for alternate investment approaches. And interest is only taxed at your marginal tax rate. As a new co-op worker that would be pretty low.</p>
<p>Interest income is taxable income. It is not forfeited, but it is taxed if your income is high enough. Interest rates on savings accounts or other liquid investments are very low at present, so any tax liability created would be small. You could also invest in a tax-exempt mutual fund through an investment account if tax liability is your #1 concern.</p>
<p>One correction to an answer above - Roth IRA principal can be withdrawn at any time with no penalty. Only the earnings are subject to penalty for early withdrawal.</p>
<p>As others have said, interest is very low these days, though that can change. If you don’t want to have to pay any taxes on interest or on earnings of any sort, the ROTH IRA is one way to go or look at some tax exempt funds. </p>
<p>If you are going to be applying for financial aid, other issues may come into play. </p>