Hi, I have a quick question. As a college student with a good summer job income, I am considering whether it would be beneficial to start a Roth IRA or a 401(k). Besides a small amount in a high-yield savings account, most of my money is invested in the market, mainly in VOO. I earn enough to pay some federal and state (MA) income taxes, but I am unsure if a retirement account would help reduce my tax liability.
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As a college student, it seems logical to use a retirement account to lower your tax burden due to their tax advantages. I would begin with a Roth IRA, as 401(k)s are typically associated with full-time employment. However, I have also heard about solo 401(k)s.
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But how would a Roth IRA lessen your tax liability if it weren’t post-tax?
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I believe it grows tax free and you can withdraw gains tax free at 60?
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Use the 401k contributions to reduce your tax burden, then put the tax savings in a Roth IRA.
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When I was a student, I invested $1,000 into a 403(b) account and didn’t touch it or adjust the investment. After 30 years, it grew 12 times in value. Invest as much as you can now, what you invest today will likely constitute the bulk of your retirement savings later.
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You should view your retirement contributions as a choice between paying taxes now or later, not just as a way to reduce your tax burden. For instance, if you earn $60k and decide to contribute $10k, the taxation of the remaining $50k stays the same, regardless of whether the contribution is pre-tax or post-tax. The difference lies in how the $10k contribution is taxed.
Since your income from a summer job is likely low, it’s probably best to contribute to a Roth account, such as a Roth IRA. If you want to invest more than the limit allows for a Roth IRA, consider a Roth 401(k). It’s not always about choosing between a 401(k) or Roth IRA, that is just general advice for those starting out who might not be familiar with all the strategies and rules.