Worked a Summer Job? This Could Be a Great Place to Put Your Money
- Working during the summer is a great way to build experience and boost your cash reserves.
- If you don't need all of your earnings right away, here's one place to consider putting your money.
- Roth IRAs come with certain benefits, including tax-free withdrawals in retirement.
Here's how to find a great home for that hard-earned cash.
Some students like to spend the summer months traveling or hanging out with friends. But that's not feasible for everyone, and if you're helping to pay for college or have other bills to cover, then you may have just spent the past two months plugging away at a job.
Now truth be told, that's not necessarily a terrible thing. Sure, you may have preferred to spend June, July, and August hanging out at the beach instead of working. But think about it this way -- once your studies wrap up, you'll have solid experience to point to on your resume, while your sunbathing friends might struggle to get hired once they enter the working world.
Plus, there's something to be said for having more money at your disposal. The earnings from your summer job could help you pad your savings or pay some of your college costs so you don't have to borrow as much to finance your education.
But if you have extra money left over from your summer job that you don't need for savings or near-term expenses, then it's important to find the right home for that cash. And there's one account you may want to consider.
Look at a Roth IRA
A Roth IRA is a savings account designed to help people save for retirement. IRAs actually come in two varieties -- traditional and Roth. With a traditional IRA, you generally get a tax break on the money you put in, and then you're then taxed on withdrawals down the line.
Roth IRAs work the opposite way -- you don't get a tax break on your contributions, but withdrawals are tax-free in retirement. And investment gains in your IRA are tax-free as well (once you fund your IRA, you can invest your money to grow it into a larger sum over time).
The reason a Roth IRA is such a great idea is multifold. First, Roth IRAs come with income limits, so higher earners can't contribute to one directly. But chances are, your summer job earnings won't come close to putting you over that threshold.
Also, with a Roth IRA, you don't get an upfront tax break on the money you put in. But if your only earnings (or primary earnings) for the year are from a summer job, then chances are, you don't need that immediate tax break so badly because your tax burden isn't that high.
Meanwhile, the fact that Roth IRA withdrawals are tax-free could make life much easier on you during retirement. That way, you won't have to fork over a share of your distributions to the IRS.
A world of opportunity
The key to growing a lot of wealth for retirement is starting to save and invest at a young age. If you put some, or all, of your summer job earnings into a Roth IRA, you'll be giving yourself a solid head start in that regard. And while you may not love the idea of locking your hard-earned money away now, you'll be more than thankful for having done so later on.
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