By Jaeman Kim

Staff Writer

As a student, the first thing that may come to your mind when it comes to retirement is, “I’ll worry about it later.” In fact, you may not even plan to think about it for at least another 5 to 10 years. However, the truth is that you should think about contributing to an IRA, or an Individual Retirement Account, as soon as you start working.

So what exactly is an IRA? An IRA is a retirement plan, with the main advantage being that there are various tax advantages, unlike simply saving money in a savings account. To understand these tax advantages, however, it is important to know the different types of IRA accounts.

 Roth IRA: Contributions, or money that is put into the IRA account, are not tax-free. For example, if you contributed $500 to this account, you would still pay taxes on the $500. However, once you start withdrawing money from a Roth IRA account, you do not have to pay taxes on these withdrawals. A Roth IRA would be beneficial in the case that you have enough money to pay your taxes besides what is going into a Roth IRA.

 Traditional IRA: A traditional IRA can be thought of as the opposite of a Roth IRA in that contributions are tax-free, but withdrawals are not. To better understand, take the $500 example from above. Unlike a Roth IRA, when you contribute the $500, this amount can be removed from your taxable income, effectively making it so that you do not pay taxes on it. However, withdrawals ARE taxed, as if they were income. So if that $500 eventually became $2,000 at retirement, once you take it out of the IRA account, this $2,000 would be added to your taxable income. A traditional IRA would be beneficial for those who expect to be in a lower tax bracket once they retire.

While there are several other types of IRA accounts, such as a SEP IRA, which is for those who are self-employed, or a self-directed IRA, we will only cover the Roth and Traditional IRA, as these two accounts are the most relevant to students.

As explained earlier, the main advantage of IRA accounts is tax-related. With a Roth IRA, you do not have to pay taxes on withdrawals, and with a Traditional IRA, you do not have to pay taxes on contributions.

When you contribute to an IRA account, you can do several things with the money. It can be used to invest in stocks, mutual funds, bonds, and several other investment tools. Stocks are the riskiest of these, in that they are very volatile. Bonds, however, are much safer. Bonds allow you to receive a constant return on the money you invest. However, since bonds are much safer, the interest rates that you earn on them are much lower. To better understand what exactly a bond is, imagine a company called “Company X” starts selling bonds to the public, offering an interest rate of 3 percent. Companies will often do this in order to raise money. If you purchase $100 of this bond, you will earn a return of 3percent every year, eventually earning that $100 back. The life of a bond may be anywhere from 6 months to 10 years. As can be seen by this example, investing in a bond is much safer than a stock.

Another investment tool available is the mutual fund. A mutual fund is a collection of stocks, bonds, and other money investments created by a financial institution. The decisions of what to invest in are made on your behalf. A mutual fund may consist of everything from Apple stock to government bonds. For example, suppose that “Company X” has a mutual fund. Then presume that this mutual fund was created using stocks from Apple, bonds from ExxonMobil, and government bonds. If you were to invest in Company X’s mutual fund, you would effectively be putting your money in Apple stock, ExxonMobil bonds, and government bonds.

So now that the basics have been covered, you may be wondering how to exactly open an IRA account. All you have to do is go to a broker, such as Fidelity or Charles Schwab, and open an account. From there, they will ask you how aggressively you want to invest, and depending on your preferences, they will spread out your investments among stocks, bonds, and mutual funds.

An aggressive investment, which younger people are more likely to pursue, would put more money into stocks and less into bonds. This will vary between what different brokers suggest, but generally, it will consist of 70 percent in stocks, and 30 percent in bonds. The reason that younger people will most like pursue this option is because they have more time to allow the volatility of stocks to work in their favor. Over long periods of time, stocks have historically provided good returns.

However, older people, such as those preparing to retire soon, will choose to go with a less aggressive investment, such as 70-80 percent in bonds. The reason for this is because they cannot afford to put too much money in stocks, where volatility is too high. A steep drop in the price of stocks, as recently seen, could equal disaster for retirement. Therefore, a larger investment in bonds, which are much safer, would be the obvious choice.

Now that all the basics have been covered, there are several important rules to remember, which will of course be covered by your broker. First of all, there are contribution limits every year. Contributions are the amount of money that you put into your IRA account. For those under the age of 50, contributions to either IRA account are limited to $4000. Also, you cannot begin to remove money from the IRA account until the age of 59.5. While there are several exceptions to this, such as in the case of disability, any early withdrawals will result in steep penalties.

Everything that has been explained above is simply general information that you should consider when planning for retirement. However, you should always consult with a professional before opening an IRA account.