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Can You Do It?

• • Yes!  The IRS has two rules on who can open an IRA:
    1. You must have received taxable compensation during the year
    2. 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

Should You Do It?

• • 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?

• • 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:
    1. Banks
    2. Mutual Fund Companies
    3. Financial Planner, like me!
  • Third, choose what to invest in
    1. 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.   
    2. 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.

How You Can Benefit

• • 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.