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One of the main themes of the Secure Act, which was passed last week, was broadening access to retirement saving programs. It has also made it easier for post graduates to save for retirement. Here’s how it works.
Retirement schemes such as 401(k)s, 403(b)s and IRAs enable you to save some of your income for retirement. That was a problem for graduate students, previously often their income wasn’t recognized by retirement saving rules. With the passage of the Secure Act, that is changing. Certain forms of graduate income are now recognized under retirement rules.
The SECURE Act stands for Setting Every Community Up For Retirement Enhancement. Here’s what it says.
‘‘The term ‘compensation’ shall include any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study.’’
This change will apply starting in 2020, specifically: “The amendment made by this section shall apply to taxable years beginning after December 31, 2019.”
So there you have it. If you are receiving money to help with a graduate or postdoctoral program, you can now save some of those funds in an IRA. That’s a good opportunity. Saving when you’re young and in a low tax-bracket can be a great way to build up a retirement nest egg. In fact, if you’re able to save enough early enough, then you may well be able to set yourself up to be a retirement millionaire. This is because a Roth IRA can let you save for retirement essentially tax-free. You pay tax on the money when it goes in, but then typically you won’t pay tax on the investment gains, dividends or when you withdraw it after that. So getting money into a Roth IRA when you’re young can be a smart move, especially if you expect to be in a higher tax-bracket in your later years. Of course, that can happen because you see the tax code changing, or because you expect your own earnings to rise.
The irony of course, is that exactly when you have a long-term horizon ahead of you and you’re in a low tax-bracket can be exactly when you need to spend every last dollar you are earning to make ends meet, or to simply minimize debt. Unfortunately, even though the Secure Act now makes it easier for post-graduates to save, it doesn’t necessarily mean they’ll be able to have the surplus funds to do so. Still one other provision of the new legislation is that 529 funds can now be used to pay down up to $10,000 of student debt, so maybe that will help.