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8 Things Millennials Need to Know About Roth IRAs

By U.S. News & World Report

If you’re a millennial and you want to start saving and investing for retirement, consider putting your money in a Roth IRA. A Roth IRA is an individual retirement account that has the potential for tax-free investment growth and withdrawals. Millennials have an opportunity to let the account grow for decades without being taxed. Here’s how young people can make the most of a Roth IRA.

Follow the rules. In order to qualify for completely tax-free withdrawals, you need to own the account for five years and start taking distributions after age 59 1/2. If you withdraw the money before meeting those two requirements you will owe income tax on the investment earnings, and they could also be subject to a 10 percent early withdrawal penalty.

[See: 10 Tips to Boost Your IRA Balance.]

Pay attention to the contribution limits. Most people are eligible to contribute up to $5,500 to a Roth IRA in 2017. Workers age 50 and older are eligible to make catch-up contributions worth up to an additional $1,000, for a maximum possible contribution of $6,500. It’s important to stick to these contribution limits because there is a 6 percent excise tax on excess contributions. Take care to withdraw the excess contributions before filing your tax return to avoid the penalty.

Max out each year. If you start making $5,500 Roth IRA contributions each year at age 25, by the time you are 65 you could potentially accumulate over $950,000, assuming you earn 6 percent annually. And even if you earn a more modest return of 4 percent annually, you would accumulate over $565,000. Since it’s a Roth account, you won’t owe income tax on that money in retirement.

Take advantage of your low tax rate . While you are in your 20s there is a good chance you are making less money than you will later on in life. Those with low incomes also pay a lower tax rate. When you make Roth IRA contributions with after- tax dollars, you are paying taxes on that money while you are in a low tax bracket. If you keep the money in the account until retirement, you don’t have to worry about paying a higher tax rate on that money later, even if you have a higher income in retirement.

[See: 10 Retirement Planning Moves to Make in Your 20s.]

Pick your investments carefully. When you open a Roth IRA you will need to make contributions and purchase investments. Figure out if you are going to purchase stocks, bonds, mutual funds or exchange-traded funds and in what proportions. Keep an eye on expense ratios when selecting investments. It’s best to come up with an investment strategy that you can stick to over the long term.

Flexible access if you need the money early. You can withdraw the amount you invested in a Roth IRA without penalties or taxes. For example, if you contributed $5,000 to a Roth IRA over a two-year period and the account value grew to $5,500, you can pull out $5,000 without worrying about taxes or penalties. However, the additional $500 would be subject to a 10 percent early withdrawal penalty and ordinary income taxes if you withdraw the money before age 59 1/2.

Distributions are allowed for a first home purchase. It’s difficult to prioritize saving for retirement when you also want to accumulate enough money to make a down payment on a home. But saving in a Roth IRA can allow you to use the money for both purposes. Even though most people think of a Roth IRA as a retirement savings vehicle, it can be used for a first-time home purchase. Roth IRAs allow you to withdraw up to $10,000 for a first home purchase.

[See: How to Pay Less Tax on Retirement Account Withdrawals.]

Make sure you are eligible to contribute. Only those with earned income are eligible to contribute to a Roth IRA, and you can’t deposit more than you earned. For example, if you earned $3,000 in 2017, you would only be able to make up to a $3,000 Roth contribution.

There are also income limits for Roth IRA eligibility. If you are a single tax filer and earn more than $133,000 in 2017, you aren’t eligible to contribute to a Roth IRA. For married couples the income cutoff is $196,000. The amount you are eligible to contribute to a Roth IRA is phased out for individuals with a modified adjusted gross income that exceeds $118,000 and couples bringing in more than $186,000. However, some high earners are able to get around these income limits by making a non-deductible contribution to a traditional IRA and immediately converting to a Roth IRA.

Joseph Carbone Jr. is a certified financial planner and founder of the Social Security Teacher blog.

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8 Things Millennials Need to Know About Roth IRAs originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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