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Student IRA: Can a Student Open a Roth IRA?

For many tax breaks, a taxpayer is ineligible if he or she is claimed as a dependent on somebody else’s return. In other words, there are numerous tax breaks for which most students are ineligible.

Fortunately, IRAs and Roth IRAs don’t work that way.

As long as you have earned income, and your modified adjusted gross income is below a certain level (It changes every year, but most students needn’t worry — see here for Roth IRA rules.), you’re eligible to make contributions to an IRA.

Roth IRA or Traditional IRA?

The primary difference between a traditional IRA and a Roth IRA is that a traditional IRA gives you a tax break now (in the form of a deduction), while a Roth IRA gives you a tax break later (in the form of tax-free withdrawals from the account).

For the most part, students aren’t overly burdened with taxes. In fact, if your income is below the standard deduction amount, you’re not paying income taxes at all. As such, the deduction you could get from making traditional IRA contributions probably has little or no value.

Takeaway: A Roth IRA is the better choice for most students.

Where to Open an IRA?

People often ask which brokerage firm offers the best investment selection. In my opinion, investment selection isn’t all that important when choosing a brokerage firm.

It’s true that certain mutual funds are only available via specific brokerage firms. But every single brokerage firm will give you access to exchange traded funds (ETFs), which you can use to build a low-maintenance, diversified portfolio.

As a result, rather than focusing on investment selection, I’d suggest looking for a brokerage firm with low costs and good customer service. Fortunately, there are several such choices.

For example, each of the following brokerage firms are super low-cost:

  • OptionsHouse: $2.95 per stock or ETF trade, with free trades for 60 days.
  • TradeKing: $4.95 per stock or ETF trade.
  • Vanguard: $7.00 per stock or ETF trade, with free trades of Vanguard ETFs.
  • Fidelity: $7.95 per stock or ETF trade, with free trades of several iShares ETFs.
  • Schwab: $8.95 per stock or ETF trade, with free trades of Schwab ETFs.

Get Started!

When you’re first beginning to invest, how much you invest will have a far larger impact than how you invest. Rather than getting hung up on choosing the absolute best investments with the absolute best brokerage firm, I’d suggest just getting started:

  1. Open an IRA,
  2. Put together a low-cost, low-maintenance, diversified portfolio (see here for examples), and
  3. Work on contributing to that portfolio as much as you can, as often as you can.

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Comments

  1. Great post. Good advice all around. Great way for students to gain experience investing. In fact, it is valuable experience before they take their first college economics course. It gives them some “real world” experience in the greatest capital markets in the world!

  2. Hi, I like the advice suggesting, “Do it now.” This is one personal finance task not to deliberate about. Very clear treatment of an important topic. Regards, Barb

If you want to discuss this article, I recommend starting a conversation over at the Bogleheads investing forum.
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