Tuesday, May 8, 2012

What to do with that pesky tax refund

Many if not all of you reading this received tax refunds this year.  This is the case for most architectural interns--filling out a fairly simple tax refund and maybe only deducting for your student loan interest puts you in the running for a decent refund and the ensuing feeling of "yeah, I hit the jackpot, yo!" when you get that refund check in your hand.  It's tempting to go out and spend it, though some of the more disciplined among you might decide to pay down (or pay off) some credit card debt with it.  But I have a third option to suggest: invest it in a Roth IRA.

In an article in the Wall Street Journal section of the Sunday 4/29/12 Denver Post, readers were reminded that some recent reports from the entities in charge of Medicare and Social Security funds state that these funds are currently slated to run dry in 2033 (barring any action between now and then to stem this tide).  This  means that anyone who is under the age of 41 right now in 2012 should expect to only receive 70% to 75% of what he or she is "supposed to" receive.  While this sounds like it's a million miles away and may very well be a Doomsday prediction, it's a vital reminder that there's never a bad time to start planning for retirement.  Time is on your side when it comes to retirement planning--even a few bucks socked away when you're 25 and then left alone will make a huge difference in 30 years when you suddenly need it. (Here's a good chart that breaks down how time is on your side when it comes to investing.)

A Roth IRA is easy enough to set up at a bank, credit union, or online investment entity, like TD Ameritrade, E-Trade, Charles Schwab, etc.  Look for one that has minimal to no fees (i.e., they won't charge you management fees as long as you only make three transactions on the account per month, etc.)  You can only put up to $5,000 into it each year, and it's after-tax income (unlike your 401(k), which is pretax income and can also help you at tax time by lowering your taxable income), but when you take out the Roth IRA money in 30+ years, the government can't tax it.  Boo-yah.  Now that's hitting the jackpot.  

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