IRA/Retirement Fund

[T_Yamamoto]

I'm back from the dead boys! Good to see the same old farts are still around on here.

I'm looking to start my IRA at the ripe age of 20 (21 in 4 months time).

I know I should do a ROTH IRA but not sure where to start it with. I know Vanguard tends to be the go to for people but I'm trying to weigh my options.

Also any knowledge about IRAs would be appreciated.

Side note: I'm also wondering if financing a car would be better than purchasing it with cash (I have enough cash on hand to purchase the car outright, this would enable me to get more miles on my card so I can travel to Japan for cheap in case of a family emergency)

 

[Brainonska511]

Keep it simple. Provided you have wage-income, just open a Roth IRA with Vanguard and put it into the retirement index fund that most closely matches the year you'll likely retire (further out years have more assets in stock index funds), especially since you're limited to a $5500/year contribution, which makes investing in several index funds difficult at first.

 

[EOM]

KISS. As said, try a targeted retirement fund, or depending on your broker you can maybe get a few index funds provided you make automatic contributions.

#1 tip: don't check the value of it daily, weekly, or even monthly. It doesn't matter. You have 50 years until it comes out. Just slowly contribute and wait for your year end statements.

 

[Brainonska511]

KISS. As said, try a targeted retirement fund, or depending on your broker you can maybe get a few index funds provided you make automatic contributions.

I wouldn't even bother with a broker. Stick with low costs index funds through Vanguard. Those extra fund costs and service fees can eat a ton from your investments in the long run.

 

[evident]

Do it through Vanguard. Start w/ a target fund. it's really that simple.

As for financing the car, I think rates are basically the same as they were last year, which means pretty damn cheap. I'd go that route if you can get less than 3%.

 

[rcpratt]

Do you have a job that offers any type of retirement fund and/or employer contributions? Need more info.

 

[KB]

I concur with the others. Start a mutual fund with Vanguard or Fidelity in a low cost index fund.

Financing the car and paying it off can be good for building your credit score at your age. If you aren't worried about credit scores then I would buy the car outright unless this will force you to dip into your 3 - 6 month emergency fund. Even though the interest rate on a car loan is really low, its still way higher than what you will get on savings in the bank. (0.1% at many banks) If I offered you a 3% CD you would take it in a heartbeat. An auto loan is like a 3% reverse CD. Not paying 3% is like having a 3% CD.

 

[zinfamous]

I'm back from the dead boys! Good to see the same old farts are still around on here.

I'm looking to start my IRA at the ripe age of 20 (21 in 4 months time).

I know I should do a ROTH IRA but not sure where to start it with. I know Vanguard tends to be the go to for people but I'm trying to weigh my options.

why a Roth? it depends on your current/long term savings goals. If you want an IRA only for retirement/long term savings, then a tr IRA is superior because you get income deductions now, so that means you are putting more money in now, with more potential growth.

If you are planning to put a downpayment on something like a house in the next ~10 years, then open a Roth now and start making whatever contributions you can afford ($5500 max per year). 10 years later, you can withdraw up to 5 years-worth of those contributions, all the while that money has been been earning interest and paying dividends (all untaxable) that didn't exist before.

I like Roths as a short-term savings tool, but you need to be aware that all contributions are locked in at a 5 year cycle for each contribution year. tr IRA is better for retirement, however (in retirement age, you can also start a conversion ladder to move money from tr IRA to Roth, to reduce your trIRA tax burden, but no need to discuss that now)

Also any knowledge about IRAs would be appreciated.

Vanguard. If your work offers IRA or 401k or both, put as much as you can afford/are comfortable with for each. Vanguard is generally the best, but Fidelity and others offer low-cost mutual funds as well. For Vanguard, and for longterm growth at your age, just put everything into VTSAX/VTSMX and forget it.

If your work offers a 401k/403b, then set your paycheck deductions to withdraw as much as you can afford. Only if you can save beyond the $18k annual IRS deduction maximum, should you worry about opening your own personal IRA and then tossing in your own money....unless you want that separate rothIRA, and only as a short term savings tool. going Roth IRA to put aside house money is much better than just tossing it into a pathetic savings account. ....of course remember that you are trapped into those 5 year time limits. But you plan for that.

Side note: I'm also wondering if financing a car would be better than purchasing it with cash (I have enough cash on hand to purchase the car outright, this would enable me to get more miles on my card so I can travel to Japan for cheap in case of a family emergency)

lolno. never finance a stupid car. Pay in cash/all up front. better yet, don't own a car unless you really need it.

 

[T_Yamamoto]

I currently don't have a job that offers contributions to my retirement (I'm still in school).

I guess there's a huge learning curve to this sort of stuff.

I was looking at an ROTH IRA because they take taxes out now rather than later (which is better for someone who's young)

 

[dullard]

Roth vs. Traditional IRA: we don't know your tax bracket now nor do we know your tax bracket in retirement. So it is hard for us to properly address that. Lets just say that if you are under the 25% tax bracket now, a Roth IRA is probably a good idea. If you are in the 33% or higher tax brackets, a Roth IRA is quite possibly a bad idea.

When you first start investing, the type of investment you make is generally fairly meaningless compared to the amount of fees you pay. For example, you might invest in the total US stock market (VTSAX) as suggested by Zinfamous or the Target Retirement 2060 (VFIFX) as suggested by Evident. If you did the maximum investment in an IRA at the end of last year, the difference between the two is a measly $47 (investing less than the maximum would be an even smaller difference). And you'll never know which one is better ahead of time. So, don't sweat it. Pick one and go with it. You can always change it later (usually at no cost).

But, do pay attention to fees. If you invest $5500 in an investment now with typical 8% returns and a low 0.16% fee (such as VFIFX) then 50 years when you cash out, you'll have $239,528. But if you instead had a more normal 1% fee, then you'd only have $162,013. And worse, if you invested in a high fee fund (such as many actively managed funds) with a 2% fee, then you'd have $101,310.8. The difference in the fees is a massive $138,217 with the actively managed fund. That is why we recommend Vanguard so highly.

Pay cash for the vehicle unless you need to build credit. If you have no credit or bad credit, then take out a small vehicle loan and pay cash for the rest. That way, you can build credit. No, you won't get miles on a card by paying differently.

 

[zinfamous]

I currently don't have a job that offers contributions to my retirement (I'm still in school).

I guess there's a huge learning curve to this sort of stuff.

I was looking at an ROTH IRA because they take taxes out now rather than later (which is better for someone who's young)

No, not really. the math has never supported that argument.

http://www.gocurrycracker.com/roth-sucks/

ROTH has it's uses, but it really isn't superior as a long-term retirement account because over that same time period, the amount you put in to the ROTH would actually be less than what you put into the tr IRA. I think it generally works out to tr IRA max contributions per year being about $1200 more in value compared to equal roth IRA contributions over the same 30-40 years. consider how much more return you are getting off of that extra $1200/year that your Roth never saw.

...this is because the tr IRA reduces your annual income and thus reduces your tax burden. The Roth is great as a secondary or tertiary savings, or even retirement account, if you have further disposable income that you would rather save. So, for pure retirement, it is far less effective than 401k/403b/tr IRA. Only use it for retirement if you just want to put away additional taxed money. Never a bad idea if you can afford it. IMO, if you don't have enough income to use it as the tertiary retirement account that it should be, then it still has value as a short-long term savings account. But of course, as you already have it open for that purpose, you can still treat it as a longer term retirement account and a vehicle for a later in life conversion ladder.

....also, read this:
http://www.madfientist.com/traditional-ira-vs-roth-ira/

Once you start approaching those golden years, you can consider setting up a Tr > Roth conversion ladder. The value in this strategy assumes that you are drawing out enough income from your retirement to put you at a minimum tax burden where any money that you move from tr to Roth over each allowable annual maximum are taxed at absolute minimal levels. This more or less allows you to have something like a tr and roth IRA all in one, which is obviously the best. But, if you want one of those type of accounts now, with much less fuss, then you should open an HSA

http://www.madfientist.com/ultimate-retirement-account/

(bear in mind that you need a crappy health plan to qualify for an HSA...I think it is currently set at $1.8k deductible to qualify?)

 

[Thump553]

I currently don't have a job that offers contributions to my retirement (I'm still in school).

I guess there's a huge learning curve to this sort of stuff.

I was looking at an ROTH IRA because they take taxes out now rather than later (which is better for someone who's young)

dullard (and others) raised some great points, but I'd like to dwell on your automatic selection of Roth versus traditional IRAs. My personal rule of thumb (and the rule most millionaires, etc follow) is absent some compelling reason it is ALWAYS better to delay taxation as long as possible. I'd almost always prefer a traditional IRA because you fund that with pre-tax dollars (thus easier to come up with the investment) and all gains are accumulated tax free until withdrawal.

I did this for about thirty years. When the 2008 stock market crash came I converted my existing IRAs to Roths (and paid a boatload of taxes)-when the market bounced back the IRAs recovered very nicely and now tax free on withdrawal.

Remember that you don't really have any idea what your tax bracket will be after retirement (nor what the tax laws will be 50 years from now either).

The best thing to do is not to overthink it, just start one. If you start a Roth and next year decide you should have done a traditional, no big loss-just start another IRA with next years contribution.

At your age I'd go with a broad stock market index fund like S&P 500, no load with as low fees as possible-pay close attention to the fees when you select a fund. All the big players like Vanguard offer these type of funds. It will take maybe twenty minutes to set one up online, don't overthink it but revisit and reanalyze your decision every few years to make sure it is still a smart investment for you.

Looking back over the years my main mistake was not paying attention to the fees.

 

[Cozarkian]

Mathematically, it is better to finance if:

1. You resist the urge to buy a more expensive car.
2. You can cash flow the payments from monthly income without dipping into savings.
3. You can safely invest the cash you would have used at a higher rate.

For example, if you have $10,000 cash and an offer to finance 80% over 5 years at 1.5% interest, you would need to: put $2,000 down, invest $8,000 in a 5 year CD paying better than 1.5% and verify the monthly payment won't cause your monthly expenses to exceed your monthly income.

Most people won't do the above.

 

[zinfamous]

dullard (and others) raised some great points, but I'd like to dwell on your automatic selection of Roth versus traditional IRAs. My personal rule of thumb (and the rule most millionaires, etc follow) is absent some compelling reason it is ALWAYS better to delay taxation as long as possible. I'd almost always prefer a traditional IRA because you fund that with pre-tax dollars (thus easier to come up with the investment) and all gains are accumulated tax free until withdrawal.

right, and your other advice is great, too.

Another thing for the OP I wanted to mention re: tr IRA vs Roth. You currently aren't working but will be soon. Your employer is very likely going to have some 401k or IRA options which, like the tr IRA, reflect pre-tax, tax-deferred savings. If you already have your own personal IRA through Vanguard or Fidelity or wherever, you already have the same type of tax-deferred account.

These days, people don't really stay in one place that long. You are going to move from one company to the next, or for whatever reason will find yourself living somewhere else. with your tr IRA, can you roll that 401k money, including employee match (if they set it up that way) into your tr IRA (no annual maximums for rollovers) tax-free, and continue to contribute and grow that pile of money regardless of whatever your life situation is at the time. You can't rollover into a roth IRA (because, you guessed it--the different tax structure). And, likewise, you can roll your tr IRA over into your 401k if you wish--say you like those options better, for whatever reason. Of course it is fine to keep your savings in those former employer accounts as long as you want, for whatever reason, and interest will continue to grow--but you can't contribute it to it unless you roll it over. So it's relatively dead at that point.

 

[Cozarkian]

Ultimately it is nice to have both Roth and traditional at retirement. That way, you can guarantee your traditional earnings will be taxed at the lower rates.

Assuming somebody retired today and had both, said person could withdraw $37,650 from the traditional and any amount needed over that from the Roth account, keeping the person in the 15% marginal bracket (for single filers).

 

[Herr Kutz]

Ultimately it is nice to have both Roth and traditional at retirement. That way, you can guarantee your traditional earnings will be taxed at the lower rates.

Assuming somebody retired today and had both, said person could withdraw $37,650 from the traditional and any amount needed over that from the Roth account, keeping the person in the 15% marginal bracket (for single filers).

I am contributing to a Roth IRA and a Traditional 401k. I use Vanugard for my IRA and put everything in VFIAX.

 

[IronWing]

(bear in mind that you need a crappy health plan to qualify for an HSA...I think it is currently set at $1.8k deductible to qualify?)

Not necessarily crappy. We have predictably high healthcare expenses every year (thanks big pharma) yet an HDHP with HSA wins every year. The premium differences between more inclusive plans and the HD plans swamp out the increased out of pocket expenses of the HD plans. We are exactly the type of people that HD plans are supposed to be bad for as we blow through the entire deductible every year yet every year the math of these plans works in our favor. The claim processing has also improved so there really isn't any difference in paperwork for us (less paperwork than an FSA ever was). An added benefit is that there is a lot less DenialCare BS with getting prescriptions filled with the HD plans.

 

[zinfamous]

Not necessarily crappy. We have predictably high healthcare expenses every year (thanks big pharma) yet an HDHP with HSA wins every year. The premium differences between more inclusive plans and the HD plans swamp out the increased out of pocket expenses of the HD plans. We are exactly the type of people that HD plans are supposed to be bad for as we blow through the entire deductible every year yet every year the math of these plans works in our favor. The claim processing has also improved so there really isn't any difference in paperwork for us (less paperwork than an FSA ever was). An added benefit is that there is a lot less DenialCare BS with getting prescriptions filled with the HD plans.

Yeah, you're right. I actually don't think it is crappy if it gives you access to an HSA, because all else being equal, it actually is a good thing, depending on expenses. I was briefly considering switching out to an HD plan just to get access to an HSA, but my current plan through Kaiser is unconscionably good, so it wouldn't make sense ($0 Deductible; $10 Co-Pay all visits + script plan; $18/month from paycheck, single coverage)

 

[T_Yamamoto]

I was talking to a friend of and his argument, since I'm in the lowest tax bracket, it's best for me to put it into a ROTH IRA (I'll be working a 10/hr part time job). Then as I near or reach my peak, to switch to a tr IRA.

I'm learning so much right now, thanks so much.

On another note, he also suggested I go for whole life insurance before opening an IRA.

 

[zinfamous]

Roth isn't a bad idea at your age, especially because you are still in turmoil phase for the next 10 years of your life. Consider it retirement for now, but a couple of years from now you'll realize that you just gifted yourself an excellent savings account that you didn't know you needed.

Of course, I'm that guy that's going to tell you that even buying a house is probably a stupid idea....but that's me.

 

[lxskllr]

Invest in canned goods.

Good seeing you Tomato

 

[IronWing]

On another note, he also suggested I go for whole life insurance before opening an IRA.

Did you unfriend him for that?

 

[PowerEngineer]

Lots of good advice in these responses. Your rationale for starting out with a ROTH IRA makes sense, but make sure you first contribute to your 401k/403b up the the amount of your employer's contribution when you do get a job after graduation. I'd stay far, far away from whole life insurance. I would resist all temptation to borrow money for anything other than your education and a home; buy a car that you are comfortable paying cash for. At your age, there's no reason to worry about making contributions into a fund targeting a retirement year.

 

[T_Yamamoto]

Did you unfriend him for that?

Nah, I don't think I'm gonna go that route though.

Lots of good advice in these responses. Your rationale for starting out with a ROTH IRA makes sense, but make sure you first contribute to your 401k/403b up the the amount of your employer's contribution when you do get a job after graduation. I'd stay far, far away from whole life insurance. I would resist all temptation to borrow money for anything other than your education and a home; buy a car that you are comfortable paying cash for. At your age, there's no reason to worry about making contributions into a fund targeting a retirement year.

Yeah, I'm going to follow their advice in terms of what to invest in. I will go for a ROTH IRA till around when I get my first big boy job. Also contributing up to my future employer's contribution seems good (because it's pretty much free money)

 

[edro]

Regardless of whether you create a Traditional IRA or a Roth IRA, I recommend using Vanguard and setting up and automatic investment plan.
That way, it comes right out of your checking account each month (or whatever interval you choose). You can set it and forget it.
After a while, it is pretty impressive what reinvested dividends and gains can do.

I recommend the lowest Expense Ratio S&P500 or Total Stock Market index fund you can get.