You should not have to take a Commerce class to know the difference between an IRA and an ING. These terms sound like another language for many people, but they will be the guardians of your money for years to come. Although not all of us will have large sums of money dropped into our bank accounts come graduation day, someday soon all of us will probably receive a paycheck. Here are some ideas about what to do with that first paycheck and those to follow.
Savings Accounts
Most of you may already have a savings account. It is important to shop for the savings plan which gives you the most interest so your money isn't sitting in an account collecting dust. Savings accounts generally offer an interest rate of less than one percent but are extremely stable. Another savings option is an ING account, an account similar to a savings account. An ING account is linked to your standard checking account at your bank so you can transfer money from checking to your ING account over the Internet or the phone. The interest rate with this type of account is over two percent.
Bank CDs
If you've got less than five years to wait for your money to grow, thenCertificates of Deposit might be right for you. One simply invests a one-time fixed sum of money for a fixed period of time, usually one to five years. Bank CDs typically offer a higher rate of interest than traditional savings accounts, daily compounding of interest and the security of FDIC insurance. Fixed investments like these are supposed to be left alone during an agreed-upon time period, set when establishing the account. You can withdraw money from your CD during that time, but you will incur penalties. When you're choosing a bank for your CD, look for one that doesn't charge any fees to open or maintain your CD account, and if possible, one that does not require a minimum deposit.
What are mutual funds?
Mutual funds are funds established by investors pooling their money to buy stocks and/or bonds. The benefit of owning a mutual fund is that one owns shares in a number of companies instead of just a single firm. Large mutual fund companies include Fidelity, Vanguard, Scudder, Putnam and American Express. If you look at Vanguard's Web site, you will find that their fees are a fraction of the price of many other companies. Vanguard offers an extensive roster of more than 100 mutual funds, including money market and bond funds (both taxable and tax-exempt), balanced funds and stock funds. For additional information on mutual funds and investing, Economics Prof. Edwin Burton suggests that all students should read Burton Malkiel's book, "A Random Walk Down Wall Street."
"I have had that book on the reading list for my finance classes for 25 years," Burton said.
Retirement Planning
It's hard to imagine planning for your retirement before you have even secured a job, but it is crucial that you begin your retirement planning as soon as possible, if you have not already done so.
IRAs: Do-It-Yourself Retirement
The government created Individual Retirement Accounts about 25 years ago as an incentive for individuals to save for retirement. IRAs have grown even more popular over the years, in part because of the uncertainties concerning the future of Social Security retirement benefits. An IRA encourages regular, long-term savings, and it also offers income tax advantages. Because of the fairly low annual contribution limit of $3,000 (this amount is scheduled to increase over the next seven years to $5,000), the IRA is not meant to be the only step you take toward retirement savings, but is meant to supplement other retirement savings options. One has the option of choosing a traditional IRA or a Roth IRA, a retirement account developed just last year. Investing in an IRA is an option for just about everyone, regardless of whether one has access to a pension or other retirement plan at work. However, the maximum annual contribution you can make may vary if you (or your spouse) also participate in an employer-sponsored plan, depending on your income level. You can invest money within your IRA in either CDs or mutual funds to maximize your return.
There is no minimum or required annual contribution to a traditional IRA, but you may contribute up to $3,000 tax-free each year. So you pay no taxes on the money you put in now but you pay taxes on the money you take out when the account reaches maturity. You can't withdraw your IRA money until age 59 and six months, with some exceptions. Also, you'll need to begin taking the minimum required distribution on your IRA by April 1 of the year after you turn 70 and six months, or the Internal Revenue Service will assess a 50-percent penalty.
The Roth IRA differs from the traditional IRA in that the money you put into it is taxed now, not when you take the money out after age 60. You should talk with someone at your bank about starting this account as soon as possible.
401k plans
As soon as you land your first job, make an appointment with someone in the Human Resources department to discuss what services the company has available for matching your investment into a retirement plan, be it a 401(k) or some other option. Note that 401(k) plans are portable so you can transfer them from employer to employer with no tax consequences. If you get a check from your old employer for the proceeds of your account, you have 60 days to roll it over into a new retirement plan or the IRS will tax the money as ordinary income. Your contributions are tax-free and your employer's contributions are not taxable. You pay no taxes until you withdraw from the account. Similar to the IRA, you can withdraw with no penalty after age 59 and six months, and you must start to withdraw by age 70 and six months.
You will undoubtedly have more questions about what to do with your money. There are plenty of Web sites with tips for students ) and your personal bank has representatives waiting to answer your questions. Also, be on the lookout for UCS-sponsored workshops on how to manage your finances.
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