Dollars and Sense: Part III
Money in the bank
Posted on February 25, 2008
The thought of life after graduation is threatening enough without the added hassle of cleaning up financial mistakes made throughout college. Students should familiarize themselves with different investment options and be sure to get as much as possible out of employers, including insurance and a 401(k) contribution match.
“Retirement was one of our main focuses,” said sophomore Bonnie Weatherill. “I mean I’m 19, who cares about when I’m 80? [But] if you start early you’re golden.”
Since the future of Social Security is so uncertain it’s best for young employees to watch out for themselves.
“People our age graduate and want to live just like their parents live now,” senior Jenny Baker said. “What they don’t realize is that it took their parents thirty years to get there.”
Weatherill said that there’s an emphasis on instant gratification in American culture and that there’s been a social shift that says not being able to afford something is negative.
Brad Barnett, senior associated director for the office of financial aid and scholarships, also commented on money trends in current society.
“It’s an, ‘I want it and I want it now’ generation,” he said.
One smart investment is an individual retirement account, of which there are two types: traditional and Roth. People who earn under $100,000 annually can contribute to a Roth IRA, and considering the job market it’s fairly safe to say that new members of the workforce will fall into this category. All earnings including interest are tax free in a Roth IRA once members reach retirement age. Roth IRAs also do not require that users withdraw funds from the account, but traditional IRAs have mandatory withdrawal periods. The drawback with Roth IRAs is the maximum income limit, currently set at about $100,000 for singles and just over $150,000 for couples.
If you use a traditional IRA, taxes are paid when members take money out of the account. For instance, if someone earns $30,000 first year out of college and put $1,000 into a traditional IRA, they will only pay taxes on $29,000 of their income, but when they withdraw their investment 40 years from now it will be tax deductible. Also, new legislation mandates that in 2010 traditional IRA’s will be eligible for conversion to Roth IRAs.
Another common investment is a 401(k). These plans are offered to wage earners at any income level and employers often match contributed funds. Like a traditional IRA there is a mandatory withdrawal period and penalties for taking money out too early or too late. Taxes are deducted from earnings on money in a 401(k), but, as with IRAs, there is a Roth option, for which interest earned on contributed funds is not tax deductible. As of 2007, both versions of the 401(k) have a savings limit of $15,500.
Two other types of employee investment plans are the 403(b), for school employees and nonprofit workers and the 457, for government employees and employees of nongovernment, tax exempt organizations such as churches or hospitals. All of these plans are very similar but have important differences. For more information on which plan will work best for you, visit bankrate.com.
“If you have a ton of money and you don’t know where it’s going, or if you have no money and you don’t know where it’s going, you’re in the same boat,” Baker said.
For more information on the dollars and sense course or further financial advice visit jmu.edu/finaid.
This article is the third in a three-part series that closely examined money management tools for students.
