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Roth or tIRA for 25 y/o Daughter?

Posted: Tue Mar 12, 2019 2:37 pm
by Heymahn
My daughter has taught Kindergarten for two years in a public school in MO. She has a 403(b) through Valic, all in Vanguard Target Retirement 2055; this is a Roth account. As she is nearly engaged and will soon be pursuing purchasing her/their first house, they have lots of expenses and are trying to preserve cash. However, she is getting a tax refund and I'd like to get her to start an IRA with $1,000 of it. So, what are your thoughts on the IRA, should she go for the tax break with the traditional IRA or do a Roth, even though her 403 is a Roth?

Thanks in advance.

Re: Roth or tIRA for 25 y/o Daughter?

Posted: Tue Mar 12, 2019 2:39 pm
by MotoTrojan
Heymahn wrote:
Tue Mar 12, 2019 2:37 pm
My daughter has taught Kindergarten for two years in a public school in MO. She has a 403(b) through Valic, all in Vanguard Target Retirement 2055; this is a Roth account. As she is nearly engaged and will soon be pursuing purchasing her/their first house, they have lots of expenses and are trying to preserve cash. However, she is getting a tax refund and I'd like to get her to start an IRA with $1,000 of it. So, what are your thoughts on the IRA, should she go for the tax break with the traditional IRA or do a Roth, even though her 403 is a Roth?

Thanks in advance.
Missing the most important item, marginal tax rate. As a young teacher I’d guess Roth is the way to go. Does she max out the 403? If not I’d suggest she put it there through some extra big contributions, to keep life simple (less accounts) assuming it has decent options to invest in (low fees).

Re: Roth or tIRA for 25 y/o Daughter?

Posted: Tue Mar 12, 2019 2:51 pm
by YoungBogle
It simply comes down to what tax bracket she thinks she’ll be in when she eventually withdraws the funds. All other info provided is irrelevant, unless you want fund a tIRA simply on the basis of tax diversification.

Re: Roth or tIRA for 25 y/o Daughter?

Posted: Tue Mar 12, 2019 3:05 pm
by Epsilon Delta
Also when and who is she marrying?

If she is marrying this year she will be filing married rather than single this year.

You also need to consider the couples joint future. If she is marrying an MD or investment banker then Roth contributions and conversions would be in order if this will be her last year to file single. If she is marrying another teacher then perhaps traditional is better.

Re: Roth or tIRA for 25 y/o Daughter?

Posted: Tue Mar 12, 2019 5:01 pm
by Duckie
Heymahn wrote:She has a 403(b) through Valic, all in Vanguard Target Retirement 2055; this is a Roth account. As she is nearly engaged and will soon be pursuing purchasing her/their first house, they have lots of expenses and are trying to preserve cash.
If they are trying to preserve cash she should switch her Roth 403b contributions to pre-tax 403b contributions for a larger take-home check.

Re: Roth or tIRA for 25 y/o Daughter?

Posted: Wed Mar 13, 2019 5:09 am
by JustinR
Traditional. Deferring taxes now is almost always the right move.

I don't know what a 403 is but if she can do traditional instead of Roth for that too, she should.

Re: Roth or tIRA for 25 y/o Daughter?

Posted: Wed Mar 13, 2019 7:42 am
by teen persuasion
IRA contribution for 2018 or 2019? You say she's expecting a refund, which implies her taxes are done. She still has time to contribute for 2018 - Roth IRA wouldn't change anything tax wise, but contributing to traditional IRA would mean she should amend her tax return to capture the tax benefit.

Personally, we've opted for traditional 401k/403b contributions with Roth IRAs (DH is a teacher). For our income and with kids, payroll tax advantaged contributions are much better for EITC (tIRA contributions won't increase EITC, but traditional 401k contributions can).

Look at the big picture - how soon do they expect to marry? In that year they should plan based on their combined income, as they will be filing as married.

Re: Roth or tIRA for 25 y/o Daughter?

Posted: Wed Mar 13, 2019 7:54 am
by deltaneutral83
JustinR wrote:
Wed Mar 13, 2019 5:09 am
Traditional. Deferring taxes now is almost always the right move.

I don't know what a 403 is but if she can do traditional instead of Roth for that too, she should.
Maybe for the typical poster on BH, but a 25 y/o teacher could easily be in the 12% marginal tax bracket for 2018 and almost certainly no more than 22%. 12% is an absolute no brainer if so, one can't possibly count on being in a lower tax bracket than that at the time the decision has to be made, particularly is marriage is on the horizon and joint tax filing is imminent in the next year. 22% isn't bad either.

Re: Roth or tIRA for 25 y/o Daughter?

Posted: Wed Mar 13, 2019 9:07 am
by Wiggums
Heymahn wrote:
Tue Mar 12, 2019 2:37 pm
My daughter has taught Kindergarten for two years in a public school in MO. She has a 403(b) through Valic, all in Vanguard Target Retirement 2055; this is a Roth account. As she is nearly engaged and will soon be pursuing purchasing her/their first house, they have lots of expenses and are trying to preserve cash. However, she is getting a tax refund and I'd like to get her to start an IRA with $1,000 of it. So, what are your thoughts on the IRA, should she go for the tax break with the traditional IRA or do a Roth, even though her 403 is a Roth?

Thanks in advance.
Not sure what tax bracket she is in but Roth is likely the best choice. time in the market is her best friend.

Re: Roth or tIRA for 25 y/o Daughter?

Posted: Wed Mar 13, 2019 9:18 am
by chevca
If they have lots of expenses (debt?) and are trying to preserve cash, putting $1000 in an IRA may not be the best idea, IMO. That may be better off going towards debt or a down payment. Does your daughter want to start an IRA right now, or is it your want?

Maybe as a wedding present you could gift her or them funds to start an IRA?

Re: Roth or tIRA for 25 y/o Daughter?

Posted: Wed Mar 13, 2019 9:20 am
by chevca
BobWickman wrote:
Wed Mar 13, 2019 9:09 am
CyclingDuo wrote:
Wed Mar 13, 2019 8:56 am
BobWickman wrote:
Wed Mar 13, 2019 8:53 am
Go with a Roth. If the democrats get their way they'll tax everybody 70%.
Bob - as a new member of BH, you might want to read the guidelines of keeping politics out of any discussion.

rules
Been on here for a few days, it’s not for me. How do I delete my account?
Are you under duress and being forced to check the forum and post? Or, are you free to walk away? :happy

Send a PM to a mod and ask them to delete your account.

Re: Roth or tIRA for 25 y/o Daughter?

Posted: Wed Mar 13, 2019 9:21 am
by Wiggums
BobWickman wrote:
Wed Mar 13, 2019 9:09 am
CyclingDuo wrote:
Wed Mar 13, 2019 8:56 am
BobWickman wrote:
Wed Mar 13, 2019 8:53 am
Go with a Roth. If the democrats get their way they'll tax everybody 70%.
Bob - as a new member of BH, you might want to read the guidelines of keeping politics out of any discussion.

rules
Been on here for a few days, it’s not for me. How do I delete my account?
Contract the administrator (Send a PM to a mod and ask them to delete your account) or notify them using the exclamation point.

Re: Roth or tIRA for 25 y/o Daughter?

Posted: Wed Mar 13, 2019 9:21 am
by RickBoglehead
Any ROTH contribution can be withdrawn at any time, tax free.

That said, the daughter is 25, and she should be planning her finances herself. OP suggests, then let her do what she wants.

Re: Roth or tIRA for 25 y/o Daughter?

Posted: Wed Mar 13, 2019 7:37 pm
by Heymahn
Thanks for all the replies. A number of questions were posed in them and here are replies:

-Her marginal tax rate is indeed 12%.
-She doesn't max out the 403 now; she's putting in $200/paycheck. Again, she's simultaneously saving for a house.
-I have no idea what tax bracket she'll be in 35-40 years from now when funds would possibly be withdrawn. As of now, her boyfriend is also a teacher. If they both remain teachers they'll likely not be high wage earners.
-It's not yet established when they'll marry; could be late this coming fall or maybe next spring. Other factors are involved, including the fact that at this time they're not yet engaged.
-The IRA contribution would be for 2018; her taxes have not yet been filed.
-Neither of them currently has any debt (cars or credit card or student loans).
-The IRA is my thought/desire, thinking the more they can put away at a younger age the greater the eventual benefit of compounding. But if just using the 403 (in the Vanguard TRF) is good enough and no need for IRA, then that's fine.
-Rick Boglehead: yes, I am trying to get information/recommendations for sound advice and let her make the decision.

Thanks again.

Re: Roth or tIRA for 25 y/o Daughter?

Posted: Wed Mar 13, 2019 9:36 pm
by Xrayman69
Wiggums wrote:
Wed Mar 13, 2019 9:07 am
Heymahn wrote:
Tue Mar 12, 2019 2:37 pm
My daughter has taught Kindergarten for two years in a public school in MO. She has a 403(b) through Valic, all in Vanguard Target Retirement 2055; this is a Roth account. As she is nearly engaged and will soon be pursuing purchasing her/their first house, they have lots of expenses and are trying to preserve cash. However, she is getting a tax refund and I'd like to get her to start an IRA with $1,000 of it. So, what are your thoughts on the IRA, should she go for the tax break with the traditional IRA or do a Roth, even though her 403 is a Roth?

Thanks in advance.
Not sure what tax bracket she is in but Roth is likely the best choice. time in the market is her best friend.
40 years of compounding with no tax liability at the end sounds pretty good. Also has flexibility of taking some out to buy house

Re: Roth or tIRA for 25 y/o Daughter?

Posted: Thu Mar 14, 2019 4:36 pm
by SGM
I have been making contributions to my children's Roth accounts since they received their first paychecks in summer jobs. I reason that they will benefit from compounding over many years before they retire. I suspect that they will have more income in the future and will pay higher taxes later. They have no student debt and are self supporting. They do contribute to tax deferred accounts on the job.

Re: Roth or tIRA for 25 y/o Daughter?

Posted: Thu Mar 14, 2019 8:05 pm
by teen persuasion
Heymahn wrote:
Wed Mar 13, 2019 7:37 pm
Thanks for all the replies. A number of questions were posed in them and here are replies:

-Her marginal tax rate is indeed 12%.
-She doesn't max out the 403 now; she's putting in $200/paycheck. Again, she's simultaneously saving for a house.
-I have no idea what tax bracket she'll be in 35-40 years from now when funds would possibly be withdrawn. As of now, her boyfriend is also a teacher. If they both remain teachers they'll likely not be high wage earners.
-It's not yet established when they'll marry; could be late this coming fall or maybe next spring. Other factors are involved, including the fact that at this time they're not yet engaged.
-The IRA contribution would be for 2018; her taxes have not yet been filed.
-Neither of them currently has any debt (cars or credit card or student loans).
-The IRA is my thought/desire, thinking the more they can put away at a younger age the greater the eventual benefit of compounding. But if just using the 403 (in the Vanguard TRF) is good enough and no need for IRA, then that's fine.
-Rick Boglehead: yes, I am trying to get information/recommendations for sound advice and let her make the decision.

Thanks again.
What is the pension situation in their state/district? Will they be eligible for SS?

If they can both expect pensions and SS in retirement, that suggests they should lean more to Roth, as the pensions and SS will fill up their lower tax brackets in retirement, and IRA withdrawals/RMDs will be taxed at higher rates.

Roth IRA contributions (not 403b) can be withdrawn at any time, so she could contribute to a Roth IRA while saving for a house, and access part of it later. Growth would stay in the Roth IRA for the future.

Changing 403b contributions to traditional going forward would increase tax savings, giving her more to save.