Service Academy Cadets, Why Aren't You Contributing to an IRA?
by John Cooney on Jan 8, 2020

Can You Do It?
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- Yes! The IRS has two rules on who can open an IRA:
- You must have received taxable compensation during the year
- You must not have turned 70 ½ by the end of the year (This will no longer apply after 1 Jan 2020 with the passage of the Secure Act)
- Since as a Service Academy cadet you are compensated by DoD, you satisfy the IRS requirements and are eligible to contribute to a traditional or a Roth IRA
- Yes! The IRS has two rules on who can open an IRA:
Should You Do It?
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- Yes! OK, this may not be a yes for everyone, you know your financial situation best, but after reading this article, hopefully you see the benefits of sacrificing a little now, to put you in a better financial position later.
How Do You Do It?
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- First, determine if you can afford to contribute to an IRA
- Second, choose an institution to invest with, among others, you can open an IRA with:
- Banks
- Mutual Fund Companies
- Financial Planner, like me!
- Third, choose what to invest in
- Traditional vs Roth
- Traditional contributions are “Pre-Tax” meaning you can deduct the amount of the contribution from your taxable income for the year. The money you contribute then grows tax-deferred and you pay income taxes when you withdraw it.
- Roth contributions are “Post-Tax” meaning you cannot deduct the amount of the contribution from your taxable income for the year. The money you contribute then grows tax-free and you do not owe income taxes when you withdraw it in retirement.
- Since the vast majority of cadets will owe little to no taxes it is likely that a Roth contribution would be more beneficial, but I recommend talking to a financial or tax professional if you are trying to decide which is better for you.
- Next, decide on the investment vehicle
- There are other options, but for most, you will be investing in a savings account, stocks, or bonds.
- Savings accounts give you a guaranteed rate of interest, but the rate will usually be low.
- Individual stocks and bonds can often give you a higher rate of return than a savings account, but a return would not be guaranteed, in fact your investment could lose money if the individual stocks and bonds you invest in decrease in value.
- Mutual Funds and ETFS are essentially “baskets” of stocks and bonds and would be my recommendation for most cadets/investors. You are not guaranteed a return and can lose money, but you spread out your risk by investing in a diverse group of stocks/bonds.
- Traditional vs Roth
How You Can Benefit
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- If you don’t believe me, listen to Albert Einstein…”Compound interest is the eight wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
- To show the power of compounding, let’s look at an example. Assuming a well-diversified account that earns 5% annually, a cadet who enters the Academy at 18 and saves $1000 each of their four years into a Roth IRA could potentially have an additional $28,000 in savings when they turn 60. The best part, if It was a Roth, is that money would be available tax-free!
It will not likely make you rich, but the benefits from starting to save early are undeniable. By sacrificing a couple Boodler runs and being intentional with your money, you can give yourself a head start to a successful retirement. Starting an IRA early, combined with consistent contributions to the TSP can put you on the path to a successful and satisfying life after the military.
John Cooney is a fee-only planner and enrolled agent based in Middleboro,MA. As a 98 West Point grad, he wishes he had read this article when he was a plebe! Contact John at john@greenandgoldfinancial.com for a complimentary consultation on whether investing in an IRA is right for you.