For younger generation, Roth IRA may be best
By Lauren Iacocca
April 22, 2004 9:00 p.m.
With hectic class schedules, many college students find it hard
to think of leisure time in the near future, let alone plan for the
leisure they expect in roughly four decades: retirement.
But Gabriel Leung, a fourth-year business economics and
psychology student, is starting to look ahead to the days of
relaxation that await him.
This summer he will begin work as a business and planning
analyst at Boeing Co. With a full-time job, he said, he will be
able to save more for the future.
“Right now I am spending pretty much everything I make.
“¦ But starting next year, I am going to max out my Roth IRA
and save enough in a 401K to make full use of employer
matching,” he said.
To follow this plan, Leung estimates he will need to save about
$7,000, or 14 percent, of his earned income.
“That is a sacrifice of about $20 a day ““ not that
much for someone with a full-time job,” he said.
By beginning to think about retirement savings now, Leung said
he believes he will form good saving habits and orient himself
toward long-term savings goals.
“If I decide not to put a priority on saving, this will
have adverse effects in the long run,” he said.
Exploring savings options early gives students time to analyze
the corresponding costs and benefits so that when they enter the
full-time working world, they have an idea of how they will choose
to put aside funds for the future.
Also, the earlier people start to save, the more opportunity
their savings have to grow.
In addition to 401K plans, in which an employer matches some
percentage of an employee’s contribution to his or her own
retirement savings, there are two other types of individual
retirement accounts that are widely used: Roth IRAs and traditional
IRAs.
Both types are designed as long-term, tax-advantaged retirement
accounts, but the way they are taxed differs markedly.
Contributions to a Roth IRA are made with after-tax money and
are never tax- deductible. The Roth’s tax benefits show up
later when withdrawals can be made federal income tax-free after
age 59.5, if the account has been open for five years.
Traditional IRAs offer tax deductibility to investors who
qualify as well as a tax deferral on earnings growth. Federal
income taxes are paid when the money is withdrawn after age
59.5.
For young people looking to open an IRA, the Roth IRA is often
the better choice because their current income taxes are
negligible, if any, said economics Professor Lee Ohanian.
They would, instead, benefit from being able to withdraw funds
tax-free in the future, he said.
Of course, not all students share Leung’s view that it is
worth saving now to earn investment income later.
“I am definitely not saving (now) for retirement ““
that will come when I have a real job,” said Jennifer
Marcella, a first-year psychology student who works for ASUCLA and
is paid minimum wage.
Her co-worker Mark JaCobson, also a first-year psychology
student, said that he is not yet independently saving for his
retirement.
“But I think my mom is putting money away for me, into
mutual funds, for my retirement,” he said.
Economics Professor Roger Farmer, who has researched
inter-temporal choice ““ consumer decision-making throughout
different time periods ““ said he observes a wide range of
students, some who live and spend for the moment and others who
more consistently save for the future.
The majority of students, unless coming from wealthy families,
do not have much money to put into long-term savings, Farmer
said.
“Most students are net borrowers, and this makes sense
because they are investing in an education,” he said.
“I did not think about (retirement savings) until I was
probably in my 30s, when I was married and had my first job”
he said.
Farmer said perhaps students are thinking about retirement now
due to the anticipated drain of Social Security funds to meet baby
boomers’ needs.
“But Social Security funds will make up a relatively small
amount of retirement income compared to private savings for the
typical UCLA graduate,” he said.
