IRA Advice For 18yo

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Qcos
Posts: 1
Joined: Sat Jan 30, 2016 5:41 pm

IRA Advice For 18yo

Post by Qcos »

Hello,

I am turning 18 in a few weeks and am excited to see that I will soon have new opportunities to invest and save money. I came across the Roth IRA and am intrigued seeing that I could essentially guarantee myself $1 million + by my mid 60's on a simple $1,000 upfront deposit. However, I have a few questions and am not really sure where to go to have them answered.

1. As I am about to go to college, I do not foresee myself being able to make $5,500 deposits each year until I am out of college. If I put $1,000 into an IRA now, can I make $500-$1000 deposits for the next few years and then increase my annual contribution once I am in a financial position to do so? In essence, does my annual contribution have to be the same each year?

2. I see that there are income limits for an IRA. Being the optimist and forward thinker that I am, if down the road I end up making more than the Roth IRA limit do I have to change to a regular IRA? So obviously I am financially eligible for a Roth IRA now, but if I make $250,000 when I am 40, do I have to switch to an IRA?

I plan to begin my IRA with $1,000 or so. Additionally, I plan to invest $500 in stocks and short term bonds. Does anyone have any additional suggestions for short term investments?
User avatar
Duckie
Posts: 9767
Joined: Thu Mar 08, 2007 1:55 pm

Re: IRA Advice For 18yo

Post by Duckie »

Qcos, welcome to the forum.
Qcos wrote:As I am about to go to college, I do not foresee myself being able to make $5,500 deposits each year until I am out of college. If I put $1,000 into an IRA now, can I make $500-$1000 deposits for the next few years and then increase my annual contribution once I am in a financial position to do so?
Yes, as long as you have the earned income, i.e. a job.
In essence, does my annual contribution have to be the same each year?
No.
I see that there are income limits for an IRA. Being the optimist and forward thinker that I am, if down the road I end up making more than the Roth IRA limit do I have to change to a regular IRA? So obviously I am financially eligible for a Roth IRA now, but if I make $250,000 when I am 40, do I have to switch to an IRA?
For people with high income there is the two-step 
Backdoor Roth IRA
 method. You contribute to a TIRA (allowed no matter how high your income) and immediately convert to a Roth IRA (allowed no matter how high your income).
I plan to begin my IRA with $1,000 or so. Additionally, I plan to invest $500 in stocks and short term bonds. Does anyone have any additional suggestions for short term investments?
Depending on the time-frame, money needed soon should be in a mix of savings accounts, CDs, money market accounts, short-term bonds such as (VBISX) Vanguard Short-Term Bond Index Fund Investor Shares (0.20%), and 
possibly I savings bonds through Treasury Direct. Not stocks.
mcraepat9
Posts: 1827
Joined: Thu Jul 16, 2015 11:46 am

Re: IRA Advice For 18yo

Post by mcraepat9 »

Qcos wrote:Hello,

I am turning 18 in a few weeks and am excited to see that I will soon have new opportunities to invest and save money. I came across the Roth IRA and am intrigued seeing that I could essentially guarantee myself $1 million + by my mid 60's on a simple $1,000 upfront deposit.do you have earned income (from working, not from interest on a savings account or other investments)? You cannot contribute to an IRA unless you have earned income in the applicable tax year. However, I have a few questions and am not really sure where to go to have them answered.

1. As I am about to go to college, I do not foresee myself being able to make $5,500 deposits each year until I am out of college. If I put $1,000 into an IRA now, can I make $500-$1000 deposits for the next few years and then increase my annual contribution once I am in a financial position to do so? the maximum you can contribute for any tax year is the lesser of (a) $5500 ($6500 from age 50 onward) and (b) your taxable compensation from working. The amount you contribute in any year does not impact your ability to contribute in any other year. In essence, does my annual contribution have to be the same each year?no

2. I see that there are income limits for an IRA. Being the optimist and forward thinker that I am, if down the road I end up making more than the Roth IRA limit do I have to change to a regular IRA? Once you make too much to contribute to a Roth IRA, you can still contribute via the "backdoor" Roth method. More fundamentally, your contributions to a Roth IRA can stay in that account forever as long as you were eligible when you made the contribution, regardless of your income earned in any future year So obviously I am financially eligible for a Roth IRA now, but if I make $250,000 when I am 40, do I have to switch to an IRA?you would only have to switch future contributions made in years when you earned that high. But, as noted, you can use the "backdoor" Roth IRA method and still get funds into a Roth IRA that way.

I plan to begin my IRA with $1,000 or so. Additionally, I plan to invest $500 in stocks and short term bonds. Does anyone have any additional suggestions for short term investments?May I ask why you are focused on short-term investments? IRA is a tax-advantaged retirement account, so the goal for that account should be long-term investments. Short term investments should ordinarily be kept in savings accounts/CDs and other short term instruments. I would read this short introductory booklet: https://www.etf.com/docs/IfYouCan.pdf and consider contributing all $1,000 to a Vanguard Target Date Retirement Fund.
Welcome! The best advice you can get is to take it slow. Ask a lot of questions. Don't invest in anything you don't fully understand. Simple is usually better. Good luck! Congrats on getting started early!
Last edited by mcraepat9 on Sat Jan 30, 2016 6:37 pm, edited 2 times in total.
Amateur investors are not cool-headed logicians.
mhalley
Posts: 10424
Joined: Tue Nov 20, 2007 5:02 am

Re: IRA Advice For 18yo

Post by mhalley »

Welcome to the forum! By thinking about retirement so early, you are destined to be very wealthy by the time yo retire.
Once you have purchased your first mutual fund (I would suggest a vanguard target retirement fund since you will be investing $1k), you can add to it in smaller amounts, you just can't invest more than the $5500 a year until you reach age 50.
If you end up making more than the cutoff for a Roth IRA, there is a workaround called a backdoor Roth that allows you to still invest in the Roth.
By definition, investments are not short term. Money that is needed within 5 years showed be saved instead of invested.
As an aside, how are you paying for college? While investing while young is great, the biggest and best investment is one you make in yourself, i.e. Ensuring you graduate from college.
User avatar
StormShadow
Posts: 1005
Joined: Thu Feb 09, 2012 5:20 pm

Re: IRA Advice For 18yo

Post by StormShadow »

Welcome to Bogleheads! Consider yourself lucky that you found this forum at such a young age. A couple of thoughts...

Past performance is not a guarantee for future performance. Never forget that. In any given day, the market can crash, and almost certainly will do so several times in your life. That said, over a LONG period of time investments contributed early-on are likely to grow considerably due to the power of compounding. Time in the market > timing the market.

Don't forget that you have to have earned income to contribute to an IRA. Sounds obvious, but you have to be careful not to over-contribute (i.e. contribute more into an IRA than you actually earned that year), otherwise you face penalties. Last I checked, it was 6% of the total amount over-contributed for each year it is sitting in the IRA. Could be a costly mistake if missed.

Read read read! This website has a plethora of information to utilize. https://www.bogleheads.org/wiki/Boglehe ... philosophy

Now with regard to your questions:

1. Technically, you could contribute as little as a dollar a year. Practically speaking, most mutual funds (including Vanguard) require a minimum of around $3000 or more to start an IRA but subsequent contributions are much more flexible (as much or as little as you want).

2. Yes, for 2015 if you earned more than $116,000 then you would not have been eligible to contribute to the Roth IRA. There are no income limits to contribute to a traditional IRA. Right now, there is a provision in the tax code that allows you to convert a traditional IRA to a Roth IRA. High income earners sometimes take advantage of this (the so-called "backdoor Roth IRA").

3. If you are saving for RETIREMENT (i.e. 40+ years from now), at your young age I'd invest in 100% stocks (including mutual funds that only invest in stocks). Just so long as you can have the discipline to STAY THE COURSE and not freak out/bail when the market inevitably crashes. Part of this is understanding your risk tolerance, but if you are this young I'd set it and forget it.

Now if you're talking about saving for SHORT TERM (i.e. plan to use the money in the next 6 mo to 1 year... for school tuition, for buying a car, etc etc), then yes, you want to be more conservative and add more short term bonds. I think 50/50 is reasonable, but even then is probably too aggressive. You have to prepare for the possibility that the stock-portion of the investments could potentially tank (i.e. lose 50-80%) at any time.
User avatar
Watty
Posts: 28813
Joined: Wed Oct 10, 2007 3:55 pm

Re: IRA Advice For 18yo

Post by Watty »

Hi,

I just wanted to point out one advantage of Roth accounts that you might not know about. With a Roth you can always withdraw your contribution(but not earnings) without paying taxes or a penalty. You normally really would not want to do this since that could leave you short of money in retirment but in a true emergency that is a nice option to have.

This could help you when you need to decide to make Roth contribution or not. For example if you have a summer job and you think you have all your expected costs for the next school year covered but you have $500 you don't expect to need. Putting it into a retirment account for the next 40 years might be a bit scary in case there is some other unexpected expense. Being able to take the money out of a Roth if needed means that you would still be OK if you put that $500 into a Roth even if your aren't sure that you won't need it anytime soon.

https://www.bogleheads.org/wiki/Roth_IR ... gency_fund
User avatar
arcticpineapplecorp.
Posts: 15014
Joined: Tue Mar 06, 2012 8:22 pm

Re: IRA Advice For 18yo

Post by arcticpineapplecorp. »

Watty wrote:Hi,

I just wanted to point out one advantage of Roth accounts that you might not know about. With a Roth you can always withdraw your contribution(but not earnings) without paying taxes or a penalty. You normally really would not want to do this since that could leave you short of money in retirment but in a true emergency that is a nice option to have.

This could help you when you need to decide to make Roth contribution or not. For example if you have a summer job and you think you have all your expected costs for the next school year covered but you have $500 you don't expect to need. Putting it into a retirment account for the next 40 years might be a bit scary in case there is some other unexpected expense. Being able to take the money out of a Roth if needed means that you would still be OK if you put that $500 into a Roth even if your aren't sure that you won't need it anytime soon.

https://www.bogleheads.org/wiki/Roth_IR ... gency_fund
Sorry...I have to ask because I keep reading about "qualified distributions" and "non qualified distributions" here:
https://www.irs.gov/publications/p590b/ ... 1000231057
and here:
http://www.investopedia.com/university/ ... thira3.asp

and it appears that there aren't taxes imposed but there can be the 10% penalty imposed if it is not a qualified distribution. I could be wrong, but I don't believe the IRS is talking about distribution of earnings, but is talking about distributions of contributions. The money contributed is intended to remain in the account at least until 59 1/2 or later EXCEPT in certain instances mentioned at the link above (disability, first time homebuyer, etc.). But I don't get the impression that Roth IRA contributions can always, whenever, under any circumstance (as long as held 5 years) be withdrawn free of penalties.

I know this has been discussed before, but maybe someone can either correct me or Watty. Whenever I think about a Roth account as an emergency fund, I'm always reminded that distributions need to be "qualified" to avoid the 10% penalty. Am I wrong about that?
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
mcraepat9
Posts: 1827
Joined: Thu Jul 16, 2015 11:46 am

Re: IRA Advice For 18yo

Post by mcraepat9 »

Arctic, a withdrawal of regular contributions from a Roth IRA is not taxable.

Per IRS Publication 590 (https://www.irs.gov/publications/p590b/ ... 1000231057)


Are Distributions Taxable?

You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s).

...

Ordering Rules for Distributions

If you receive a distribution from your Roth IRA that is not a qualified distribution, part of it may be taxable. There is a set order in which contributions (including conversion contributions and rollover contributions from qualified retirement plans) and earnings are considered to be distributed from your Roth IRA. For these purposes, disregard the withdrawal of excess contributions and the earnings on them (discussed under What if You Contribute Too Much? in chapter 2 of Pub. 590-A). Order the distributions as follows.

Regular contributions.

Conversion and rollover contributions, on a first-in, first-out basis (generally, total conversions and rollovers from the earliest year first). See Aggregation (grouping and adding) rules, later. Take these conversion and rollover contributions into account as follows:

Taxable portion (the amount required to be included in gross income because of the conversion or rollover) first, and then the

Nontaxable portion.

Earnings on contributions.



Indeed, if you look at your second link, the diagram states that distributions of regular contributions are both tax-free and penalty-free (http://www.investopedia.com/university/ ... z3ymwP6oxO)
Amateur investors are not cool-headed logicians.
User avatar
David Jay
Posts: 14569
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: IRA Advice For 18yo

Post by David Jay »

The minimum for a TargetRetirement fund in a Vanguard IRA (either style) is $1000, so you do need to contribute at least 1000 to get into one of those funds. Did you earn (W-2, Box 1) at least $1000 in 2015? If so, you are eligible.

The TR funds (you would probably use TR 2060) are great starter funds but many people like the simplicity and stay with them over the years. I started my daughter out in a TR fund (TR 2050, but is was a while ago and she started a lot later than you).
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
triskelion
Posts: 35
Joined: Sat Sep 20, 2014 8:18 am

Re: IRA Advice For 18yo

Post by triskelion »

Qcos -

Awesome that you are thinking and learning about this at such an early age! Right now your greatest capital is human capital - simply by asking the question you are seeking to employ that capital well. All of the prior posters hit a lot of great topics and information, so I just want to add a different piece: You did not indicate how you are paying for college (but I wouldn't be surprised if you have that taken care of through scholarships and family contributions!) My point is simply if you are taking out student loans, you may wish to save all your money to defray costs with a possible exception of some account minimum in a Roth IRA for its own educational value.
User avatar
arcticpineapplecorp.
Posts: 15014
Joined: Tue Mar 06, 2012 8:22 pm

Re: IRA Advice For 18yo

Post by arcticpineapplecorp. »

mcraepat9 wrote:Arctic, a withdrawal of regular contributions from a Roth IRA is not taxable.

Per IRS Publication 590 (https://www.irs.gov/publications/p590b/ ... 1000231057)


Are Distributions Taxable?

You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s).

...

Ordering Rules for Distributions

If you receive a distribution from your Roth IRA that is not a qualified distribution, part of it may be taxable. There is a set order in which contributions (including conversion contributions and rollover contributions from qualified retirement plans) and earnings are considered to be distributed from your Roth IRA. For these purposes, disregard the withdrawal of excess contributions and the earnings on them (discussed under What if You Contribute Too Much? in chapter 2 of Pub. 590-A). Order the distributions as follows.

Regular contributions.

Conversion and rollover contributions, on a first-in, first-out basis (generally, total conversions and rollovers from the earliest year first). See Aggregation (grouping and adding) rules, later. Take these conversion and rollover contributions into account as follows:

Taxable portion (the amount required to be included in gross income because of the conversion or rollover) first, and then the

Nontaxable portion.

Earnings on contributions.



Indeed, if you look at your second link, the diagram states that distributions of regular contributions are both tax-free and penalty-free (http://www.investopedia.com/university/ ... z3ymwP6oxO)
Thanks. The chart was helpful but I went to the IRS page anyway since they're the original source. I think I was confused thinking only qualified distributions were not subject to the 10% penalty, but it looks like on figure 2-1 at https://www.irs.gov/publications/p590b/ ... 1000231057 it says "The portion of the distribution allocable to earnings may be subject to a tax and it may be subject to the 10% additional tax."

So the way I read this, even though the distribution may not be "qualified" the contributions aren't affected...just the earnings on those contributions. So contributions can be taken at any time, just not any earnings on those contributions (if you're trying to avoid a tax/penalty).

Thanks for clarifying.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
User avatar
Miriam2
Posts: 4383
Joined: Fri Nov 14, 2014 10:51 am

Re: IRA Advice For 18yo

Post by Miriam2 »

Qcos wrote:I plan to begin my IRA with $1,000 or so. Additionally, I plan to invest $500 in stocks and short term bonds. Does anyone have any additional suggestions for short term investments?
Is your $500 for stocks and short term bonds In addition to the $1,000 you're investing in your Roth IRA?
Where are you planning on investing your $500 in stocks and short term bonds - your Roth IRA or some brokerage?
User avatar
Tamarind
Posts: 2809
Joined: Mon Nov 02, 2015 1:38 pm

Re: IRA Advice For 18yo

Post by Tamarind »

Welcome, Qcos!

Others have said this in passing but I think it's important that you hear it clearly: You may only contribute as much to an IRA as you have earned income in that year.

That means if you are not working while you are in school, you are not eligible to contribute even if you have the money in savings. This doesn't stop you from saving up the money, but you won't be able to put it into an IRA until you are working. If you earn $500 by working during the year, you can put up to $500 into the IRA, and so on up to the max of $5,500.

This makes even a part-time or summer job very valuable to you, not for the amount of money you'll earn, but for opening up IRA eligibility for you early in your life, so that money can have the longest possible time to compound.
Tamahome
Posts: 2325
Joined: Wed Feb 27, 2013 12:03 pm
Location: Atlanta, GA

Re: IRA Advice For 18yo

Post by Tamahome »

OP: Remember that you must maintain a balance of $1,000 to keep the Vanguard fund, and that you have to keep your earnings in the account. I disagree with using the Roth as an emergency fund. You need to think of it as wealth you are building for your future. If you start with $1,000 and do not contribute again through college, that is fine. Do not stretch too far to contribute and then have to worry about getting the money back out. Put in what you can. If you can't add to it, you can't add to it. Your minimum additional contribution is $100. If that is what you can do, do that. Do not put yourself in a situation where you might have to incur debt because of the investing, though. There is plenty of time to invest, and it is great that you are getting a good start. Just don't trip coming out of the gate.

When you graduate from college, keep living like you are in college. Build money. You will do well.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
jasonwc
Posts: 53
Joined: Thu Dec 31, 2015 10:38 pm

Re: IRA Advice For 18yo

Post by jasonwc »

Dulocracy wrote:OP: Remember that you must maintain a balance of $1,000 to keep the Vanguard fund, and that you have to keep your earnings in the account...Your minimum additional contribution is $100.
I do not believe these statements are true. First, the minimum additional contribution for the TR funds, and all funds to my knowledge, is $1. https://personal.vanguard.com/us/funds/ ... =INT#tab=3

In addition, I think the $1,000 is simply the minimum to initially open a position in the mutual fund. I am certain Vanguard will not do anything if the account value falls below $1,000 because of a change in market value. I don't know how they treat withdrawals. However, I do know the Prime Money Market fund requires a $3,000 minimum, but I've had it as low as $0 since I opened the account. Perhaps there is an exception for MM accounts, since it is used for settlement. Still, I haven't seen anything indicating that you must maintain a minimum balance except for Admiral shares where you will get demoted to the Investor share class if you withdraw funds placing you below $10k. However, if the market value of your holdings go below $10k per fund, you can keep the Admiral shares.
Tamahome
Posts: 2325
Joined: Wed Feb 27, 2013 12:03 pm
Location: Atlanta, GA

Re: IRA Advice For 18yo

Post by Tamahome »

jasonwc wrote:
Dulocracy wrote:OP: Remember that you must maintain a balance of $1,000 to keep the Vanguard fund, and that you have to keep your earnings in the account...Your minimum additional contribution is $100.
I do not believe these statements are true. First, the minimum additional contribution for the TR funds, and all funds to my knowledge, is $1. https://personal.vanguard.com/us/funds/ ... =INT#tab=3

In addition, I think the $1,000 is simply the minimum to initially fund the mutual fund. I am certain Vanguard will not do anything if the account value falls below $1,000 because of a change in market value. I don't know how they treat withdrawals. However, I know the Prime Money Market fund requires a $3,000 minimum, but I've had it as low as $0 since I opened the account. Perhaps there is an exception for MM accounts, since it is used for settlement. Still, I haven't seen anything indicating that you must maintain a minimum balance except for Admiral shares where you will get demoted to the Investor share class if you withdraw funds placing you below $10k. However, if the market value of your holdings go below $10k per fund, you can keep the Admiral shares.
You are correct that if there is a market reason for the value dropping that there will be no problem. However, as has been discussed at length on this board, a withdrawal will not immediately cause a problem, but there would likely be a forced distribution at the year mark. Money Market accounts are a holding place for funds, and Vanguard apparently does not enforce them as strictly, but they can enforce for MM accounts. Also, realize that in OP's situation, there will not be additional funds for a larger account that would encourage Vanguard to bend the rules. Nonetheless, while not immediate, Vanguard will close an account that is less than the fund minimum due to a withdrawal. Keeping the minimum in the account is key. Therefore, no one should invest if they might need to take out so much money that it drops below the minimum.

As far as whether or not it is a good idea to add $500 and then pull it back out, the hassle is just not worth it for the minimal returns (and risk of loss of value). I stand by my advice to OP to invest prudently during this time, while watching the budget.

As to minimum new investments: Most funds have a $100 minimum. Not having any target date funds, I did not realize that you could put in $1. Thank you for the new information. OP: the same advice stands. If you can only put in a few dollars, you can only put in a few dollars. Do not stress yourself financially to add. If you have the flexibility to add, do so. Don't forget to keep an emergency fund.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
hnzw rui
Posts: 578
Joined: Tue Sep 22, 2015 2:26 pm

Re: IRA Advice For 18yo

Post by hnzw rui »

Qcos wrote:I am turning 18 in a few weeks and am excited to see that I will soon have new opportunities to invest and save money. I came across the Roth IRA and am intrigued seeing that I could essentially guarantee myself $1 million + by my mid 60's on a simple $1,000 upfront deposit. However, I have a few questions and am not really sure where to go to have them answered.
I did the back calculation for $1M with just one-time $1K deposit over a 50 year span and the return required for that is a very optimistic 14.8% annualized.
Dulocracy wrote:OP: Remember that you must maintain a balance of $1,000 to keep the Vanguard fund, and that you have to keep your earnings in the account. I disagree with using the Roth as an emergency fund. You need to think of it as wealth you are building for your future. If you start with $1,000 and do not contribute again through college, that is fine. Do not stretch too far to contribute and then have to worry about getting the money back out. Put in what you can. If you can't add to it, you can't add to it. Your minimum additional contribution is $100. If that is what you can do, do that. Do not put yourself in a situation where you might have to incur debt because of the investing, though. There is plenty of time to invest, and it is great that you are getting a good start. Just don't trip coming out of the gate.
A Roth IRA is just a type of account. I think it's fine to use it as a container for an emergency fund. Just make sure the actual emergency fund money is located in safe assets.

For example, someone only has $5K total available for savings in a year. That person can invest $1K for retirement in a Target Retirement fund via Roth IRA brokerage account and $4K for emergency savings in Roth IRA CD or savings account. Once they're making enough to max out Roth IRA while saving in taxable account, then transfer the funds from the Roth IRA CD/savings account to the Roth IRA brokerage.
hnzw rui
Posts: 578
Joined: Tue Sep 22, 2015 2:26 pm

Re: IRA Advice For 18yo

Post by hnzw rui »

Dulocracy wrote:As to minimum new investments: Most funds have a $100 minimum. Not having any target date funds, I did not realize that you could put in $1.
Maybe Vanguard changed the minimums? I remember it being $100 for the Target Retirement funds, too, before. I just checked VTSMX (Total Stock Investor) and VTSAX (Total Stock Admiral) and the minimum for additional investments is $1.
Tamahome
Posts: 2325
Joined: Wed Feb 27, 2013 12:03 pm
Location: Atlanta, GA

Re: IRA Advice For 18yo

Post by Tamahome »

A Roth IRA is just a type of account. I think it's fine to use it as a container for an emergency fund. Just make sure the actual emergency fund money is located in safe assets.

For example, someone only has $5K total available for savings in a year. That person can invest $1K for retirement in a Target Retirement fund via Roth IRA brokerage account and $4K for emergency savings in Roth IRA CD or savings account. Once they're making enough to max out Roth IRA while saving in taxable account, then transfer the funds from the Roth IRA CD/savings account to the Roth IRA brokerage.[/quote]

I agree that a Roth IRA **can** be used as an emergency fund. I disagree that it is appropriate for young investors who tend not to be as informed and who often have different life circumstances.

Let us take an individual with a Roth IRA with $50,000. It is invested 80/20. This means $10,000 is in bonds. As you state, "Just make sure that the actual emergency fund is located in safe assets."

In our current scenario, we have a young person investing in a target date fund. This is a good choice, but inappropriate for an emergency fund. As a young person, Vanguard likely has him/her in 90% stock and about 30-40% of that is international. Suppose there is a 20% downturn in stock? He/She will be forced into selling at a loss if there is a need for the emergency fund. This makes this an inappropriate location for an emergency fund until he/she has enough in the account to separate it into stocks and bonds.

Further, the low balance and minimum balance requirement means that $1,000 is trapped in this account. If he/she is not prepared for an emergency, he/she may be forced to sell from this account, clearing the entire account. This would result in taxes and penalties on growth. Therefore, with a low balance Roth, it is best not to consider it as a part of an emergency fund. He/she would be better off not investing than go through that scenario.

Then there is the question of whether or not it is truly more beneficial to have money in a Roth invested in bonds. Typically, you want your highest expected return assets to be in the Roth. Stocks over bonds. Small value over total market (if one tilts). While there is no guarantee, if your statistical probability is greater that an asset class will return more, the eventual tax-free benefits over the period of 40-50 years of growth in a high performing asset outweigh the ability to use a bond fund for an emergency fund.

What then to use for an emergency fund? Do we keep it all in cash? Maybe. Or you could explore the idea of municipal bonds to expand tax advantaged space and provide stability for those emergency funds.

I agree that the Roth CAN be used as an emergency fund. I disagree that it is the best option in most scenarios. In a situation where someone is invested mostly in stocks with a low balance, I completely disagree that this is a good strategy for the original poster or any other individual looking at Roth investing. Being a bit more cautious about putting money into Roth and not thinking of it as a bank also leads to better investing behavior overall. (Although this last bit is not based on large data, but off of three years of observing people on this site.)
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
Tamahome
Posts: 2325
Joined: Wed Feb 27, 2013 12:03 pm
Location: Atlanta, GA

Re: IRA Advice For 18yo

Post by Tamahome »

hnzw rui wrote:
Dulocracy wrote:As to minimum new investments: Most funds have a $100 minimum. Not having any target date funds, I did not realize that you could put in $1.
Maybe Vanguard changed the minimums? I remember it being $100 for the Target Retirement funds, too, before. I just checked VTSMX (Total Stock Investor) and VTSAX (Total Stock Admiral) and the minimum for additional investments is $1.
Ah, I know as a certainty that VTSAX had a minimum of $100. They have changed it. Good to know.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
hnzw rui
Posts: 578
Joined: Tue Sep 22, 2015 2:26 pm

Re: IRA Advice For 18yo

Post by hnzw rui »

Dulocracy wrote:I agree that a Roth IRA **can** be used as an emergency fund. I disagree that it is appropriate for young investors who tend not to be as informed and who often have different life circumstances.

Let us take an individual with a Roth IRA with $50,000. It is invested 80/20. This means $10,000 is in bonds. As you state, "Just make sure that the actual emergency fund is located in safe assets."

In our current scenario, we have a young person investing in a target date fund. This is a good choice, but inappropriate for an emergency fund. As a young person, Vanguard likely has him/her in 90% stock and about 30-40% of that is international. Suppose there is a 20% downturn in stock? He/She will be forced into selling at a loss if there is a need for the emergency fund. This makes this an inappropriate location for an emergency fund until he/she has enough in the account to separate it into stocks and bonds.

Further, the low balance and minimum balance requirement means that $1,000 is trapped in this account. If he/she is not prepared for an emergency, he/she may be forced to sell from this account, clearing the entire account. This would result in taxes and penalties on growth. Therefore, with a low balance Roth, it is best not to consider it as a part of an emergency fund. He/she would be better off not investing than go through that scenario.

Then there is the question of whether or not it is truly more beneficial to have money in a Roth invested in bonds. Typically, you want your highest expected return assets to be in the Roth. Stocks over bonds. Small value over total market (if one tilts). While there is no guarantee, if your statistical probability is greater that an asset class will return more, the eventual tax-free benefits over the period of 40-50 years of growth in a high performing asset outweigh the ability to use a bond fund for an emergency fund.

What then to use for an emergency fund? Do we keep it all in cash? Maybe. Or you could explore the idea of municipal bonds to expand tax advantaged space and provide stability for those emergency funds.

I agree that the Roth CAN be used as an emergency fund. I disagree that it is the best option in most scenarios. In a situation where someone is invested mostly in stocks with a low balance, I completely disagree that this is a good strategy for the original poster or any other individual looking at Roth investing. Being a bit more cautious about putting money into Roth and not thinking of it as a bank also leads to better investing behavior overall. (Although this last bit is not based on large data, but off of three years of observing people on this site.)
I guess whether or not this is a viable approach depends on the person. I can separate intended usage from the asset location.

For example, in the following scenario, the target is to have $20k emergency fund (assume the savings below are after capturing the full 401k match):

Year 1 $5k savings
Roth IRA CD/Savings/myRA: $5k
Total EF: $5k
Total Retirement: $0
Total Balance: $10k

Year 2 $10k savings
Roth IRA CD/Savings/myRA: $5k ($10k running balance)
Taxable CD/Savings: $5k ($5k running balance)
Total EF: $15k
Total Retirement: $0
Total Balance: $15k

Year 3 $12k savings
Roth IRA Mutual Funds: $5k + $2k ($7k running balance)
Roth IRA CD/Savings/myRA: -$2k ($8k running balance)
Taxable CD/Savings: $7k ($12k running balance)
Total EF: $20k
Total Retirement: $7k
Total Balance: $27k

Year 4 $15k savings
Roth IRA Mutual Funds: $5k + $8k ($20k running balance)
Roth IRA CD/Savings/myRA: -$8k ($0 running balance)
Taxable CD/Savings: $10k ($22k running balance)
Total EF: $22k
Total Retirement: $20k
Total Balance: $42k

For me, whether the Roth IRA is an ideal place for low growth assets while building up the e-fund is a non-issue given the alternative is to put $0 in Roth (or some negligible amount) while building up the e-fund. At the end of 4 years, if you had prioritized taxable over Roth, you would only have $10k in Roth and $32k in taxable.
protagonist
Posts: 9242
Joined: Sun Dec 26, 2010 11:47 am

Re: IRA Advice For 18yo

Post by protagonist »

Welcome!!

OK, after all this input from your superego, here is the voice of your id speaking.

You are 17. Do you have a ton of dispensible cash? Because if not, and you plan to be a starving student for the next 4 to 10 plus years like most of us were, maybe you want to spend your $1000 on whatever fun you could have instead of saving it at this point (I hear the cringes and groans from the audience already)....

I mean, if it is going to make the difference between your being able to go to Europe in the summer after your freshman year, or even eat out and go to a concert from time to time, or buy a clunker so you don't have to stick out your thumb or ride the bus, the fact is you will probably wind up with enough money anyway if you start saving diligently once you have a career. So maybe you should just enjoy being a kid and get some adventures under your belt instead while you still have the chance.

They may actually serve you better when (and if) you reach retirement age than a dubious shot at another million dollars.

-Beelzebub.
Last edited by protagonist on Tue Feb 02, 2016 1:40 pm, edited 1 time in total.
Tamahome
Posts: 2325
Joined: Wed Feb 27, 2013 12:03 pm
Location: Atlanta, GA

Re: IRA Advice For 18yo

Post by Tamahome »

hnzw rui wrote:
For me, whether the Roth IRA is an ideal place for low growth assets while building up the e-fund is a non-issue given the alternative is to put $0 in Roth (or some negligible amount) while building up the e-fund. At the end of 4 years, if you had prioritized taxable over Roth, you would only have $10k in Roth and $32k in taxable.
You do not address, however, the very real risks to this strategy. I am very risk tolerant. However, if someone is investing $1,000, and the minimum to hold a fund open is $1,000, they have then put in 100% of their needed emergency fund into a situation where they must either liquidate or leave the money in the account. This creates unnecessary expense if the money is taken out in the way of penalties and taxes on the growth. What is the plus side? Presuming a 6% growth rate, aiming for $60 profit is not worth the hassle and risk.

You also gloss over the fact that OP would be investing in a fund that is essentially 90% stock. If the market crashes and the OP needs $1,000, but only $600 remains, this defeats the purpose of using the Roth as an emergency fund. My point is that the initial state is a completely inappropriate point to use this strategy. It is only after accumulating more in the way of assets that this strategy loses the risks that the OP would currently face.

Now, we know that OP may have an emergency fund outside of this money. I laud the OP's initiative to start a Roth IRA at this point. As commendable as that is, it would be irresponsible to direct the OP to immediately use the Roth as an emergency fund knowing the volatility of the underlying assets. No one on this site would recommend an emergency fund in 90% stock investment, especially since emergencies and economic downturn often coincide. It simply is not the right purpose for the OP at this time. (Unless you are suggesting that the OP simply take the risk of the interest and penalties, as well as forgo the growth of stocks and use a bond fund only. Again, this is somewhat counter-intuitive to the purpose of growing money in a Roth.)
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
Tamahome
Posts: 2325
Joined: Wed Feb 27, 2013 12:03 pm
Location: Atlanta, GA

Re: IRA Advice For 18yo

Post by Tamahome »

protagonist wrote:Welcome!!

OK, after all this input from your superego, here is the voice of your id speaking.

You are 17. Do you have a ton of dispensible cash? Because if not, and you plan to be a starving student for the next 4 to 10 plus years like most of us were, maybe you want to spend your $1000 on whatever fun you could have instead of saving it at this point (I hear the cringes and groans from the audience already)....

I mean, if it is going to make the difference between your being able to go to Europe in the summer after your freshman year, or even eat out and go to a concert from time to time, or buy a clunker so you don't have to stick out your thumb or ride the bus, the fact is you will probably wind up with enough money anyway if you start saving diligently once you have a career. So maybe you should just enjoy being a kid and get some adventures under your belt instead while you still have the chance.

They may actually serve you better when you reach retirement age than a dubious shot at another million dollars.

-Beelzebub.
No. Do not listen to the devil. (Beelzebub is protagonist's signature)

I applaud your decision to start a Roth. I paid down my second mortgage bit by bit. I went every week to put something on the second mortgage. The smallest amount that I put on it was $1.47 all in change. When my wife asked me why I did that, I told her: the habit of saving is more important than the amount. If I have money to go on the mortgage, it goes on it. I am free of the second mortgage at this point in time. You are doing the absolute right thing. Put aside money as you can. If you set several times a year (January and July?) to evaluate your savings, and you can put $100 at each time, you will find that you will be much better at savings. Eventually, you will move that to once a month. After each month, determine what you can invest (or just save in a savings account). The habit of savings is going to be one of the best things you did for yourself. Good luck!
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
protagonist
Posts: 9242
Joined: Sun Dec 26, 2010 11:47 am

Re: IRA Advice For 18yo

Post by protagonist »

Dulocracy wrote: No. Do not listen to the devil. (Beelzebub is protagonist's signature)
*offering Dulocracy an apple.....*
Tamahome
Posts: 2325
Joined: Wed Feb 27, 2013 12:03 pm
Location: Atlanta, GA

Re: IRA Advice For 18yo

Post by Tamahome »

protagonist wrote:
Dulocracy wrote: No. Do not listen to the devil. (Beelzebub is protagonist's signature)
*offering Dulocracy an apple.....*
Ok, I'll bite....
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
hnzw rui
Posts: 578
Joined: Tue Sep 22, 2015 2:26 pm

Re: IRA Advice For 18yo

Post by hnzw rui »

Dulocracy wrote:
hnzw rui wrote:For me, whether the Roth IRA is an ideal place for low growth assets while building up the e-fund is a non-issue given the alternative is to put $0 in Roth (or some negligible amount) while building up the e-fund. At the end of 4 years, if you had prioritized taxable over Roth, you would only have $10k in Roth and $32k in taxable.
You do not address, however, the very real risks to this strategy. I am very risk tolerant. However, if someone is investing $1,000, and the minimum to hold a fund open is $1,000, they have then put in 100% of their needed emergency fund into a situation where they must either liquidate or leave the money in the account. This creates unnecessary expense if the money is taken out in the way of penalties and taxes on the growth. What is the plus side? Presuming a 6% growth rate, aiming for $60 profit is not worth the hassle and risk.

You also gloss over the fact that OP would be investing in a fund that is essentially 90% stock. If the market crashes and the OP needs $1,000, but only $600 remains, this defeats the purpose of using the Roth as an emergency fund. My point is that the initial state is a completely inappropriate point to use this strategy. It is only after accumulating more in the way of assets that this strategy loses the risks that the OP would currently face.

Now, we know that OP may have an emergency fund outside of this money. I laud the OP's initiative to start a Roth IRA at this point. As commendable as that is, it would be irresponsible to direct the OP to immediately use the Roth as an emergency fund knowing the volatility of the underlying assets. No one on this site would recommend an emergency fund in 90% stock investment, especially since emergencies and economic downturn often coincide. It simply is not the right purpose for the OP at this time. (Unless you are suggesting that the OP simply take the risk of the interest and penalties, as well as forgo the growth of stocks and use a bond fund only. Again, this is somewhat counter-intuitive to the purpose of growing money in a Roth.)
Just because the money is in Roth doesn't mean you have to invest it in mutual funds. Please note that I specifically used safe assets such as CDs, savings and myRA (similar to TSP G-fund) in my example for monies earmarked as emergency fund. I did not advocate putting e-fund money in equities or even bond funds.

As for using bonds and other low growth assets being counter-intuitive with growing money in a Roth - you'll only be using safe assets short term. In my example, it was just 3-4 years. After 4 years (when the taxable e-fund has been fully funded), all the Roth money can be moved to a more aggressive AA.

In my above example, let's say the person retires at year 40, makes no additional contributions and 8% growth for mutual fund account.

Scenario 1: Use Roth as temporary placeholder for e-fund, assuming no tax drag from dividends, etc in taxable.
Roth: $7k * 1.08 ^ (40 - 3) + $13k * 1.08 ^ (40 - 4) = $328,305 tax free
Taxable: $2k * 1.08 ^ (40 - 4) = $31,936 ($29,936 subject to ltcg tax)

Scenario 2: Prioritize saving e-fund in taxable, assuming no tax drag from dividends, etc in taxable.
Roth: $5k * 1.08 ^ (40 - 3) + $5k * 1.08 ^ (40 - 4) = $166,069 tax free
Taxable: $2k * 1.08 ^ (40 - 3) + $10k * 1.08 ^ (40 - 4) = $194,173 ($182,173 subject to ltcg tax)

In both cases, you have a $360k portfolio. However, scenario 2 might be subject to a larger tax bite depending on federal marginal tax bracket and state of residence.

Mind, depending on the OP's circumstances, it might be OK to put his/her $1k in a mutual fund (e.g. if still being bankrolled by parents, etc).
Tamahome
Posts: 2325
Joined: Wed Feb 27, 2013 12:03 pm
Location: Atlanta, GA

Re: IRA Advice For 18yo

Post by Tamahome »

hnzw rui wrote: Just because the money is in Roth doesn't mean you have to invest it in mutual funds. Please note that I specifically used safe assets such as CDs, savings and myRA (similar to TSP G-fund) in my example for monies earmarked as emergency fund. I did not advocate putting e-fund money in equities or even bond funds.

This is precisely my point. OP had a stated goal of maximizing the Roth money. You cannot safely meet that goal and use the money for an emergency fund.

As for using bonds and other low growth assets being counter-intuitive with growing money in a Roth - you'll only be using safe assets short term. In my example, it was just 3-4 years. After 4 years (when the taxable e-fund has been fully funded), all the Roth money can be moved to a more aggressive AA.

In my above example, let's say the person retires at year 40, makes no additional contributions and 8% growth for mutual fund account.

Scenario 1: Use Roth as temporary placeholder for e-fund, assuming no tax drag from dividends, etc in taxable.
Roth: $7k * 1.08 ^ (40 - 3) + $13k * 1.08 ^ (40 - 4) = $328,305 tax free
Taxable: $2k * 1.08 ^ (40 - 4) = $31,936 ($29,936 subject to ltcg tax)

Scenario 2: Prioritize saving e-fund in taxable, assuming no tax drag from dividends, etc in taxable.
Roth: $5k * 1.08 ^ (40 - 3) + $5k * 1.08 ^ (40 - 4) = $166,069 tax free
Taxable: $2k * 1.08 ^ (40 - 3) + $10k * 1.08 ^ (40 - 4) = $194,173 ($182,173 subject to ltcg tax)

In both cases, you have a $360k portfolio. Incorrect. You forget the tax drag over that period of time. You must pay taxes on the money as you go. However, scenario 2 might be subject to a larger tax bite depending on federal marginal tax bracket and state of residence. And that tax bite is along the way, which means a much lower return.

Mind, depending on the OP's circumstances, it might be OK to put his/her $1k in a mutual fund (e.g. if still being bankrolled by parents, etc). I think I covered that OP needs to make sure that OP is secure before making Roth investments. In any event, as the only funds apparently available to OP have a significant stock allocation (no fund other than the STAR fund or target date funds show as available at the $1,000 entry point), it seems that we agree that this strategy is not appropriate for the OP, as OP only has funds with stock allocation which you admit are bad in this situation. I really do not want this to become an argument, however, so I suggest we move on.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
hnzw rui
Posts: 578
Joined: Tue Sep 22, 2015 2:26 pm

Re: IRA Advice For 18yo

Post by hnzw rui »

Dulocracy wrote:
hnzw rui wrote:Scenario 1: Use Roth as temporary placeholder for e-fund, assuming no tax drag from dividends, etc in taxable.
Roth: $7k * 1.08 ^ (40 - 3) + $13k * 1.08 ^ (40 - 4) = $328,305 tax free
Taxable: $2k * 1.08 ^ (40 - 4) = $31,936 ($29,936 subject to ltcg tax)

Scenario 2: Prioritize saving e-fund in taxable, assuming no tax drag from dividends, etc in taxable.
Roth: $5k * 1.08 ^ (40 - 3) + $5k * 1.08 ^ (40 - 4) = $166,069 tax free
Taxable: $2k * 1.08 ^ (40 - 3) + $10k * 1.08 ^ (40 - 4) = $194,173 ($182,173 subject to ltcg tax)

In both cases, you have a $360k portfolio. Incorrect. You forget the tax drag over that period of time. You must pay taxes on the money as you go. However, scenario 2 might be subject to a larger tax bite depending on federal marginal tax bracket and state of residence. And that tax bite is along the way, which means a much lower return.

Mind, depending on the OP's circumstances, it might be OK to put his/her $1k in a mutual fund (e.g. if still being bankrolled by parents, etc). I think I covered that OP needs to make sure that OP is secure before making Roth investments. In any event, as the only funds apparently available to OP have a significant stock allocation (no fund other than the STAR fund or target date funds show as available at the $1,000 entry point), it seems that we agree that this strategy is not appropriate for the OP, as OP only has funds with stock allocation which you admit are bad in this situation. I really do not want this to become an argument, however, so I suggest we move on.
Please note, I specifically mentioned assuming no tax drag from dividends, distributions, etc (let's pretend OP is forever in 15% marginal bracket, tax law doesn't change so 0% ltcg/qdiv and lives in a no income tax state). Still, you've pretty much confirmed that in most cases, Scenario 1 is better (use Roth IRA with safe assets as temp e-fund). By the way, Target Income is only 30% stock so fairly conservative. Target 2015 is 50/50.

My point is Roth IRA does not equal high stock allocation mutual funds. Roth IRA is just a container. You can open a Roth IRA FDIC insured CD or savings account at Capital One or similar for just $100. I'm not sure if there are any minimums for myRA. It's something useful to do early on if only to get the (5-year) clock ticking. Investing can come later.

Whether using a mutual fund with an aggressive allocation is suitable for the OP or not depends on his individual circumstances. If he will not need the $1,000 and any additional investments made to the mutual fund for a long, long time, then it's fine. If he thinks he might need to raid it within a few years, then I agree, it's a bad idea. I still recommend opening a Roth IRA account - just not at Vanguard or other brokerage but rather at myRA or somewhere FDIC insured.
Tamahome
Posts: 2325
Joined: Wed Feb 27, 2013 12:03 pm
Location: Atlanta, GA

Re: IRA Advice For 18yo

Post by Tamahome »

hnzw rui wrote: Please note, I specifically mentioned assuming no tax drag from dividends, distributions, etc (let's pretend OP is forever in 15% marginal bracket, tax law doesn't change so 0% ltcg/qdiv and lives in a no income tax state). Still, you've pretty much confirmed that in most cases, Scenario 1 is better (use Roth IRA with safe assets as temp e-fund). By the way, Target Income is only 30% stock so fairly conservative. Target 2015 is 50/50.

I said above that I would bite the apple. Apparently, I am easily tempted. Yes, if we use target date funds completely inappropriate for the OP's goals, we can use a retiree's fund to skew the argument. These are not the funds OP would be using.

My point is Roth IRA does not equal high stock allocation mutual funds. Roth IRA is just a container. You can open a Roth IRA FDIC insured CD or savings account at Capital One or similar for just $100. I'm not sure if there are any minimums for myRA. It's something useful to do early on if only to get the (5-year) clock ticking. Investing can come later.

However, as EmergDoc points out often on his blog, and is often pointed out on this site, you SHOULD put your highest expected return assets in Roth space. The anticipated (but not guaranteed) larger growth should be in the portion of the tax advantaged accounts that will never be taxed again. The lower growth assets should be the ones that face taxes at the end in traditional accounts. Further, as stated above, while the Roth is only a vehicle, in this case (the case we are actually asked to evaluate), advising a fund that is not higher in stock allocation to an 18 year old would be inappropriate. Even if it was not inappropriate, the Roth space is space that I would argue (as mentioned here) should be used for higher expected return assets no matter what one's overall allocation is. Of course, there are exceptions to that over which we could quibble like in very high income situations with a very large taxable account, but.... again... not what we are discussing for OP's situation.

Whether using a mutual fund with an aggressive allocation is suitable for the OP or not depends on his individual circumstances. If he will not need the $1,000 and any additional investments made to the mutual fund for a long, long time, then it's fine. If he thinks he might need to raid it within a few years, then I agree, it's a bad idea. I still recommend opening a Roth IRA account - just not at Vanguard or other brokerage but rather at myRA or somewhere FDIC insured.

If we are going to start changing recommendations as the argument continues, this is going to take forever. My advice stands. OP should open a target date Roth IRA if OP is stable. OP should take into account the minimums and consider this money "locked in". OP should add as OP can, while being cautious so as not to wind up having to deal with the hassle of a withdrawal and filling out the appropriate tax forms (and costs an 18 year old would likely incur in having to pay someone to handle that matter, though even without these costs, it is best to plan and avoid the situation). OP stated that the intended goal was growth. Great! Let us focus on the situation and goals of the OP as stated. Again, my advice stands.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
hnzw rui
Posts: 578
Joined: Tue Sep 22, 2015 2:26 pm

Re: IRA Advice For 18yo

Post by hnzw rui »

Dulocracy wrote:However, as EmergDoc points out often on his blog, and is often pointed out on this site, you SHOULD put your highest expected return assets in Roth space. The anticipated (but not guaranteed) larger growth should be in the portion of the tax advantaged accounts that will never be taxed again. The lower growth assets should be the ones that face taxes at the end in traditional accounts. Further, as stated above, while the Roth is only a vehicle, in this case (the case we are actually asked to evaluate), advising a fund that is not higher in stock allocation to an 18 year old would be inappropriate. Even if it was not inappropriate, the Roth space is space that I would argue (as mentioned here) should be used for higher expected return assets no matter what one's overall allocation is. Of course, there are exceptions to that over which we could quibble like in very high income situations with a very large taxable account, but.... again... not what we are discussing for OP's situation.

If we are going to start changing recommendations as the argument continues, this is going to take forever. My advice stands. OP should open a target date Roth IRA if OP is stable. OP should take into account the minimums and consider this money "locked in". OP should add as OP can, while being cautious so as not to wind up having to deal with the hassle of a withdrawal and filling out the appropriate tax forms (and costs an 18 year old would likely incur in having to pay someone to handle that matter, though even without these costs, it is best to plan and avoid the situation). OP stated that the intended goal was growth. Great! Let us focus on the situation and goals of the OP as stated. Again, my advice stands.
Yes, it's ideal to put high growth assets in Roth. I'm not arguing that.

However, my recommendation for using Roth with low growth assets is just a temporary situation. Between putting $0 in Roth IRA (and losing the space for that year forever) and delaying opening a Roth IRA account until a person has a fully funded e-fund in taxable versus using Roth space for e-fund in safe assets temporarily, my recommendation is to use Roth as temporary e-fund.

Imho, OP should absolutely open a Roth IRA now (assuming that $1k is from earned income). Whether he places Roth funds in FDIC insured savings (short-term) or invests in mutual funds depends on his situation/stability.

https://www.bogleheads.org/wiki/Roth_IR ... gency_fund
  • Since emergency funds should be stable and not volatile, you should put your emergency fund in a Roth IRA in a fund that will hold its value reliably.
  • In developing a retirement portfolio's overall Asset allocation, having all or part of a Roth IRA allocated toward an emergency fund can complicate the math. You should make sure to exclude the emergency fund portion in a Roth IRA from your overall asset allocation as it pertains to your retirement assets.
  • For behavioral and psychological reasons, investors are advised to avoid "raiding" retirement accounts which is why an emergency fund is typically held in a taxable account and not in tax-advantaged accounts intended for retirement savings. Therefore, an investor undertaking this tactic must have the discipline and account management skills to keep the emergency fund portion of her Roth IRA separate from the retirement portion. This principle can be made easier to follow by putting these amounts in different mutual funds.
Mind, I do have this discipline (particularly since the plan is to have Roth e-funds in an entirely different account) so given the math is in favor of Roth, I biased towards this route. For someone who can't handle the behavioral and psychological aspects, then yes, using Roth is probably not a good idea.
Tamahome
Posts: 2325
Joined: Wed Feb 27, 2013 12:03 pm
Location: Atlanta, GA

Re: IRA Advice For 18yo

Post by Tamahome »

Again, that is a level of complexity that I would not advise an 18 year old to take. Either he/she is stable and can invest, or he/she is not stable and should keep it simple, stick to the basics, and read vexatiously. It is not that an 18 year old is not intelligent, but that someone who has not yet gone to college needs to really learn this stuff before taking that step. OP may be the one exception to this rule. I was an honors student who got into law school. I would not have trusted me with this idea at that time. While it may seem simple to us, remember that OP is beginning the journey. Even if OP was familiar with this process, for reasons stated above, I do not believe it to be an appropriate strategy in this particular individual's case.

OP, congratulations on starting this journey. As I said, I am certain you will do well! Keep it up!
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
hnzw rui
Posts: 578
Joined: Tue Sep 22, 2015 2:26 pm

Re: IRA Advice For 18yo

Post by hnzw rui »

Dulocracy wrote:Again, that is a level of complexity that I would not advise an 18 year old to take. Either he/she is stable and can invest, or he/she is not stable and should keep it simple, stick to the basics, and read vexatiously. It is not that an 18 year old is not intelligent, but that someone who has not yet gone to college needs to really learn this stuff before taking that step. OP may be the one exception to this rule. I was an honors student who got into law school. I would not have trusted me with this idea at that time. While it may seem simple to us, remember that OP is beginning the journey. Even if OP was familiar with this process, for reasons stated above, I do not believe it to be an appropriate strategy in this particular individual's case.
I respectfully disagree. Maybe it's the engineering/math major in me (and the fact that I've always loved playing with numbers) but I don't think age is the primary determinant for the suitability of this approach. I reckon personality probably plays a bigger role. I've known one or two 16 year olds who could have handled this. I also know plenty of 20+ year olds who couldn't (probably the majority of folks and by 20+, I mean even those in their 60s or older). The fact that the OP is here on Bogleheads asking for advice has me hopeful that he's one of those few exceptions.
Tamahome
Posts: 2325
Joined: Wed Feb 27, 2013 12:03 pm
Location: Atlanta, GA

Re: IRA Advice For 18yo

Post by Tamahome »

hnzw rui wrote:has me hopeful
I like certainty. I also do not like advising someone just getting started to immediately jump into alternative strategies, however legitimate, that have the potential to derail that individual's plans and/or motivation to continue. As an example, I tilt small and value. I recommend that people start with a three fund and THEN decide if tilting is right for them. Experience is something you can only get with time. Comfort level is something you can only identify with time. I got paid to go to college, won both math team and debate team competitions, won the nation's second oldest scholastic key, and was savvy enough to get through undergrad and law school with $500 in debt total (associated with taking the bar exam, not student loans). I also have a very high opinion of myself. With all of that ego, I still would not have advised me to take this strategy because I simply did not have the experience necessary at that point. (By the way, in no way am I trying to actually brag, but make a point. It is likely that you and I are the only two reading this post anymore). I stand by my prior assertions, and I would suggest the OP start simple and then work complexity into the mix as OP progresses.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
protagonist
Posts: 9242
Joined: Sun Dec 26, 2010 11:47 am

Re: IRA Advice For 18yo

Post by protagonist »

Dulocracy wrote:
protagonist wrote:Welcome!!

OK, after all this input from your superego, here is the voice of your id speaking.

You are 17. Do you have a ton of dispensible cash? Because if not, and you plan to be a starving student for the next 4 to 10 plus years like most of us were, maybe you want to spend your $1000 on whatever fun you could have instead of saving it at this point (I hear the cringes and groans from the audience already)....

I mean, if it is going to make the difference between your being able to go to Europe in the summer after your freshman year, or even eat out and go to a concert from time to time, or buy a clunker so you don't have to stick out your thumb or ride the bus, the fact is you will probably wind up with enough money anyway if you start saving diligently once you have a career. So maybe you should just enjoy being a kid and get some adventures under your belt instead while you still have the chance.

They may actually serve you better when you reach retirement age than a dubious shot at another million dollars.

-Beelzebub.
No. Do not listen to the devil. (Beelzebub is protagonist's signature)

I applaud your decision to start a Roth. I paid down my second mortgage bit by bit. I went every week to put something on the second mortgage. The smallest amount that I put on it was $1.47 all in change. When my wife asked me why I did that, I told her: the habit of saving is more important than the amount. If I have money to go on the mortgage, it goes on it. I am free of the second mortgage at this point in time. You are doing the absolute right thing. Put aside money as you can. If you set several times a year (January and July?) to evaluate your savings, and you can put $100 at each time, you will find that you will be much better at savings. Eventually, you will move that to once a month. After each month, determine what you can invest (or just save in a savings account). The habit of savings is going to be one of the best things you did for yourself. Good luck!
OK, Duloc, I will concede you make a good point, this diligent 17 y o OP should start learning to save now.

But I would suggest a compromise.

Rather than putting the $1000 towards his/her retirement, he/she should save for a trip to Europe after sophomore year. With any luck he/she can turn the $1000 into $1060 within two years....and that extra $60 could make the difference of affording a plane ticket.
Tamahome
Posts: 2325
Joined: Wed Feb 27, 2013 12:03 pm
Location: Atlanta, GA

Re: IRA Advice For 18yo

Post by Tamahome »

protagonist wrote:
OK, Duloc, I will concede you make a good point, this diligent 17 y o OP should start learning to save now.

But I would suggest a compromise.

Rather than putting the $1000 towards his/her retirement, he/she should save for a trip to Europe after sophomore year. With any luck he/she can turn the $1000 into $1060 within two years....and that extra $60 could make the difference of affording a plane ticket.
That sounds like a fine savings goal for a separate goal, but starting retirement savings will set OP up for a life of saving, good habits, and profit. I recommend saving for fun after one is financially secure.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
protagonist
Posts: 9242
Joined: Sun Dec 26, 2010 11:47 am

Re: IRA Advice For 18yo

Post by protagonist »

Dulocracy wrote:
protagonist wrote:
OK, Duloc, I will concede you make a good point, this diligent 17 y o OP should start learning to save now.

But I would suggest a compromise.

Rather than putting the $1000 towards his/her retirement, he/she should save for a trip to Europe after sophomore year. With any luck he/she can turn the $1000 into $1060 within two years....and that extra $60 could make the difference of affording a plane ticket.
That sounds like a fine savings goal for a separate goal, but starting retirement savings will set OP up for a life of saving, good habits, and profit. I recommend saving for fun after one is financially secure.
No fun before 50?
Tamahome
Posts: 2325
Joined: Wed Feb 27, 2013 12:03 pm
Location: Atlanta, GA

Re: IRA Advice For 18yo

Post by Tamahome »

Absolutely fun before 50. My wife and I spent $20,000 on the honeymoon for three weeks in Japan. However, I saved for it as a separate goal.

My point is to set aside savings for retirement first, and then set separate goals second, third, etc. I am all about enjoying life. I just prefer to make sure that I (and more importantly, my wife) will not suffer in the future for today's enjoyment.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
Post Reply