Roth IRA for a Summer Intern

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Roth IRA for a Summer Intern

Postby highbeta » Sat May 12, 2012 8:56 am

I am about to start my first job. It is a summer internship so I do not think that I will have access to the company's 401k plan. I would like to open a Vanguard Roth IRA and invest up to the $5000 limit over the course of the summer.

How should I allocate my investments? I like the simplicity of investing in the Retirement 2060 Fund, but I hopefully will not retire until at least 2068. If I use my own allocation I am not sure if I should use 100% TSM because I am only 19, my age in bonds, or something even more conservative because my intended career has a very high "beta". I would like to say that I have a high tolerance for risk, but I have never invested my own money before.

Are there any other tax advantaged vehicles that I should consider? I looked into I-bonds, but it looks like I will not be able to use the tax-emption for education expenses, because I am not yet 24.

Thanks for your help. I really have no idea as to what I should be doing.
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Re: Roth IRA for a Summer Intern

Postby Johm221122 » Sat May 12, 2012 9:47 am

Consider lifestrategy growth fund it's 80/20
Good luck!
I bonds will make great emergency fund!
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Re: Roth IRA for a Summer Intern

Postby Muchtolearn » Sat May 12, 2012 9:50 am

OP, I wish all oungsters were as foresighted as you. Now, first, wait until the job is over so you see how much you made. You can contribute until the end of the year and even april 15. Second, (as a father) don't be silly. At age 19, deciding whether you want to work until 2060 or 2068 is silly. YO have no idea what is ahead of you for life. In 2068, you would be 75 year old. You might not even be alive !!
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Re: Roth IRA for a Summer Intern

Postby highbeta » Sat May 12, 2012 10:13 am

Johm221122 wrote:Consider lifestrategy growth fund it's 80/20
Good luck!
I bonds will make great emergency fund!


The Growth fund is more conservative than the TR2060 fund. Is there a reason why it would be better for my situation? I already have an emergency fund in the form of a checking account. The balance is substantially larger than the amount that I am looking to put into my Roth IRA.

It seems like the only benefit of I-bonds is that I can avoid the kiddie tax by deferring interest payments until I am older than 24. Is there something I am missing.

Thank you for your wishes of good luck. I hope the same comes to you.

Muchtolearn wrote:OP, I wish all oungsters were as foresighted as you. Now, first, wait until the job is over so you see how much you made. You can contribute until the end of the year and even april 15. Second, (as a father) don't be silly. At age 19, deciding whether you want to work until 2060 or 2068 is silly. YO have no idea what is ahead of you for life. In 2068, you would be 75 year old. You might not even be alive !!


Thank you for your support!

My understanding is that the Roth IRA contribution limit is 100% of net earnings or $5000, whichever is less. As a result, there is no point in waiting to see how much I earn after taxes. I intend to contribute to the IRA as my net earnings allow me. I am hoping to find other low-cost tax advantaged vehicles for the rest of my earnings, but it is rather difficult without a full-time job so I will just put the rest in my after-tax account or maybe even spend it.

I was being slightly facetious with the TR2068 comment. I don't think the allocation would be any different anyway as Vanguard's Target Retirement funds seem to keep the 90/10 split in the early stages.

Edit: kiddy --> kiddie
Last edited by highbeta on Sat May 12, 2012 10:34 am, edited 2 times in total.
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Re: Roth IRA for a Summer Intern

Postby tibbitts » Sat May 12, 2012 10:17 am

Luckily you may not have to worry - most internship these days are unpaid, so you can't make any IRA contributions at all.

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Re: Roth IRA for a Summer Intern

Postby highbeta » Sat May 12, 2012 10:22 am

tibbitts wrote:Luckily you may not have to worry - most internship these days are unpaid, so you can't make any IRA contributions at all.

Paul


I think that's absolutely terrible as it means that not everyone can take on those internships. The situation is made even worse, because these internships are often required to secure full-time employment. That only further exacerbates the inequality that we have in this country. I have been fortunate enough to find a paid internship and will earn just over $20k (net) this summer. Next summer, I don't expect to be nearly as lucky.

Edit: I just realized that we cannot discuss politics in this forum. I want to clarify that I am not making any normative statements in this post.
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Re: Roth IRA for a Summer Intern

Postby investor1 » Sat May 12, 2012 10:31 am

TD funds tend to remain at an AA until 25-30 years from the target date. After that, they rebalance for you every five years increasing the percentage in bonds.

At this point in your life, there won't be much difference between at TD fund and another fund with the same AA. Go with the one with the lower costs unless you really never want to think about this again (until retirement).

You will have to decide your AA. IMHO, 80/20 is too conservative for a 20 yr/old, but it's your money not mine. Typically people recommend figuring out your AA first, then look for low cost funds. TSM is good, an S&P tracker is good, TBM is good. Take a look at what the TD funds are investing in to see other funds which you might be able to get at a lower cost.

Honestly if it were me, I'd put it into Vanguard's S&P index, 100% stock, and not worry about my AA until after graduation when I regularly have money going into my portfolio. If you are starting now, you are already ahead. A few years at 100% stock 40 years from retirement isn't going to be that big of a deal.
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Re: Roth IRA for a Summer Intern

Postby Johm221122 » Sat May 12, 2012 10:34 am

I recommended life strategy growth because it meets age in bonds and 20% in bonds but 2065 fund is also great
For your EF I bonds are tax Deffered and keep up with inflation
Actually my first instinct was 100% stocks as other poster stated but 20% bonds is usually recommended
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Re: Roth IRA for a Summer Intern

Postby Bob's not my name » Sat May 12, 2012 11:34 am

A Roth IRA is inferior to a traditional IRA for some college students. Are you saying you don't need your summer earnings to pay for school? Do you have any student loans? What state are you working in and what is your state of residence? I'm asking because you may be able to use a TIRA to avoid state taxes on your earnings. Also, a TIRA may allow you to reduce federal taxes and still get a Roth IRA if, as you predict, you make less next year.

This is how I read your question: "In 2012 I will make more money than ever before and probably more than I'll make next year, so since I'm in the highest tax bracket I've ever experienced, I think I'll expose as much of my income as possible to taxes."
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Re: Roth IRA for a Summer Intern

Postby highbeta » Sat May 12, 2012 7:47 pm

Bob's not my name wrote:A Roth IRA is inferior to a traditional IRA for some college students. Are you saying you don't need your summer earnings to pay for school? Do you have any student loans? What state are you working in and what is your state of residence? I'm asking because you may be able to use a TIRA to avoid state taxes on your earnings. Also, a TIRA may allow you to reduce federal taxes and still get a Roth IRA if, as you predict, you make less next year.

This is how I read your question: "In 2012 I will make more money than ever before and probably more than I'll make next year, so since I'm in the highest tax bracket I've ever experienced, I think I'll expose as much of my income as possible to taxes."


I do not need the earnings to pay for school, and I do not have any student loans.

Thank you for your advice. You are absolutely right that I do not know my tax-bracket for next year. There is no reason for me to make the Roth vs Traditional decision this summer. I am a resident of and will be working in New York so I will have to pay state tax even if I convert instead of contributing directly.
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Re: Roth IRA for a Summer Intern

Postby Bob's not my name » Sat May 12, 2012 8:45 pm

highbeta wrote:You are absolutely right that I do not know my tax-bracket for next year. There is no reason for me to make the Roth vs Traditional decision this summer. I am a resident of and will be working in New York so I will have to pay state tax even if I convert instead of contributing directly.
Too bad about the state tax. You're right that you can wait on the Roth vs. Traditional decision until you know whether your federal bracket will be lower next year.

You made it sound like there's no chance you'll return to the same employer next summer, but just in case: some employers allow summer interns to contribute to the 401k their second summer -- that is, they consider them to have worked a year. I think it's rare, but I know of one example -- I believe it was essential to remain on the employee list through the academic year though.
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Re: Roth IRA for a Summer Intern

Postby grabiner » Sun May 13, 2012 11:28 pm

highbeta wrote:IHow should I allocate my investments? I like the simplicity of investing in the Retirement 2060 Fund, but I hopefully will not retire until at least 2068.


You can change funds at any time. If you start in the 2060 fund, you can switch to the 2070 fund with no cost when Vanguard opens it in a few years. (And there is no difference in allocation between the Target Retirement funds more than 20 years from retirement.)

And the Target Retirement funds are a great way to get started investing, because they are single funds that cover essentially everything you would want to invest in.
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Re: Roth IRA for a Summer Intern

Postby dickenjb » Mon May 14, 2012 6:56 am

investor1 wrote:TD funds tend to remain at an AA until 25-30 years from the target date. After that, they rebalance for you every five years increasing the percentage in bonds.


Sort of. They rebalance constantly and then embark on a glide path. I would not call changing the AA rebalancing. I think you understand what goes on but chose the wrong word to describe it.
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Re: Roth IRA for a Summer Intern

Postby investor1 » Mon May 14, 2012 7:35 am

dickenjb wrote:
investor1 wrote:TD funds tend to remain at an AA until 25-30 years from the target date. After that, they rebalance for you every five years increasing the percentage in bonds.


Sort of. They rebalance constantly and then embark on a glide path. I would not call changing the AA rebalancing. I think you understand what goes on but chose the wrong word to describe it.

Agreed. Good post.
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Re: Roth IRA for a Summer Intern

Postby JoeJohnson » Mon May 14, 2012 8:58 am

I'm curious what field a 19y/o gets a 20k summer internship. If you can say, that would be awesome
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Re: Roth IRA for a Summer Intern

Postby goggles » Mon May 14, 2012 1:48 pm

JoeJohnson wrote:I'm curious what field a 19y/o gets a 20k summer internship. If you can say, that would be awesome


My bet is finance. The user name, highbeta, also suggests this. But it's extremely unlikely that someone not from an Ivy League or top-10 public school could get this kind of internship.

Big law firms also have this kind of deal for law students, but they call them summer associates.
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Re: Roth IRA for a Summer Intern

Postby Bob's not my name » Tue May 15, 2012 4:28 am

goggles wrote:
JoeJohnson wrote:it's extremely unlikely that someone not from an Ivy League or top-10 public school could get this kind of internship.
Or Stanford, MIT, CalTech ...

What is it with bogleheads' obsession with the Ivy League?
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Re: Roth IRA for a Summer Intern

Postby highbeta » Tue May 15, 2012 7:18 am

JoeJohnson wrote:I'm curious what field a 19y/o gets a 20k summer internship. If you can say, that would be awesome


As goggles said, finance is one field. Technology is another. I'm sure that there are similar opportunities in other areas as well.

goggles wrote:My bet is finance. The user name, highbeta, also suggests this. But it's extremely unlikely that someone not from an Ivy League or top-10 public school could get this kind of internship.

Big law firms also have this kind of deal for law students, but they call them summer associates.


Several of my high school friends who did not go to well known universities have similar internships. I've actually heard that big law summer associate pay blows any undergraduate internships out of the water. They also get wined and dined quite a bit. It's very cushy.

Bob's not my name wrote:
goggles wrote:
JoeJohnson wrote:it's extremely unlikely that someone not from an Ivy League or top-10 public school could get this kind of internship.
Or Stanford, MIT, CalTech ...

What is it with bogleheads' obsession with the Ivy League?


That's to say nothing of UChicago, Georgetown, Williams, Wesleyan, and many others. For finance or technology, Chicago or MIT would serve you far better than Brown. People forget that the Ivy League is just a sports league.

Thank you for all the responses, but I am still having trouble figuring out an asset allocation that is appropriate for my situation. I understand that 100% TSM will give me the highest risk, and that adding even a small amount of TBM would allow me to significantly reduce the risk without having a large impact on the return. Right now I leaning towards the TR2060 fund, because then I can forget about AA and rebalancing and can just focus on my education and career.
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Re: Roth IRA for a Summer Intern

Postby Johm221122 » Tue May 15, 2012 8:33 am

As far as your AA goes 80,90 or 100% stocks will not make enough difference to you until you graduate.You fund choice will change when you get company/goverment retirement plan.retirement fund,life strategy or total market index are fine.More future investments and time are most important now.life strategy growth 80/20 would be my choice
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Re: Roth IRA for a Summer Intern

Postby KyleAAA » Tue May 15, 2012 9:03 am

Just throw it in the Target Retirement 2060 fund for now until you have more money to invest and have had time to learn more about the topic. It's in a Roth IRA so you can sell without taxes at any time and transfer the money into something else.
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Re: Roth IRA for a Summer Intern

Postby Jerilynn » Tue May 15, 2012 6:11 pm

Bob's not my name wrote:
goggles wrote:
JoeJohnson wrote:it's extremely unlikely that someone not from an Ivy League or top-10 public school could get this kind of internship.
Or Stanford, MIT, CalTech ...

What is it with bogleheads' obsession with the Ivy League?

These types of things come up from time to time. In a nutshell, those that went to high priced schools, say they are so glad they went there. Those who did't say they are so glad they didn't.
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
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Re: Roth IRA for a Summer Intern

Postby Bob's not my name » Tue May 15, 2012 6:21 pm

No, my point was that many bogleheads seem to think the top private schools are all Ivy League.
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Re: Roth IRA for a Summer Intern

Postby xerty24 » Wed May 16, 2012 10:44 am

goggles wrote:
JoeJohnson wrote:I'm curious what field a 19y/o gets a 20k summer internship. If you can say, that would be awesome

Big law firms also have this kind of deal for law students, but they call them summer associates.

Big law firms had this kind of deal, but in today's economy many of them are taking no summer associates, rescinding job offers previously made to prior summer associates, and similar good news. These days bankruptcy law (corporate or personal) is one of the few "growth" areas in the legal sector.
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Re: Roth IRA for a Summer Intern

Postby goggles » Wed May 16, 2012 1:56 pm

Bob's not my name wrote:
goggles wrote:
JoeJohnson wrote:it's extremely unlikely that someone not from an Ivy League or top-10 public school could get this kind of internship.
Or Stanford, MIT, CalTech ...

What is it with bogleheads' obsession with the Ivy League?


Touchy, touchy. Anyway, I suspect you know what I meant. You aren't getting one of these internships without going to a top-20 school. "Ivy League" is both a football league and shorthand for an excellent school. Anyway, it isn't my obsession with the Ivy League here--it is that of financial firms only hiring from name schools.
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