Portfolio set-up for my sister-in-law

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Triple digit golfer
Posts: 10430
Joined: Mon May 18, 2009 5:57 pm

Portfolio set-up for my sister-in-law

Post by Triple digit golfer »

Emergency funds: Three months of expenses in a savings account, soon to be a high yield savings.

Debt: No debt

Tax Filing Status: Single

Tax Rate: 12% Federal, 2.85% State marginal rates

State of Residence: Ohio

Age: 29

Desired Asset allocation: She said she has no idea, but said she probably would only rarely log in to her account because she's not interested for another 30 years. I told her about Vanguard Target Retirement funds and she said she would prefer one of those because she feels comfortable that she wouldn't have to make any decisions.

Portfolio is currently $0 besides the 3 months of expenses in savings

Current retirement assets: None. No company-sponsored plan available.

New annual Contributions
$4,200 Vanguard Roth or Traditional IRA. Mutual funds only.

Other information:

She makes around $39k a year and adds around $500 per month to savings, so not a terrible savings rate. The reason the balance is only 3 months of expenses is because she just paid off her new car that she bought two years ago that had a 5.5% 7 year loan. :oops: At least it's a Toyota so it should last a long time.

I figure that conservatively, her car will last 12 more years. She works close to home and all her friends are close by. She might put 8,000 miles a year on the car at the absolute most. I think she said she just went over 10,000 and she's had it two years already.

Questions:

1. Is a Roth or Traditional IRA the best option for her? She has no major upside to her earning potential, but reasonably good job security and/or ability to find another job paying the same. I was considering traditional because a) tax deduction now, b) she'll be able to get more into the account closer to the max and c) given that she has approximately a $0 net worth now, it's highly likely that she'll be in a low tax bracket in retirement.

2. Given that she only has $6,000 annually to invest or save, which makes more sense?
A) Max the IRA and then 2-3 years before car purchase, stop contributing.
Pros: Maxing now
Con: Not contributing for two years later on
B) Don't max the IRA, and save the difference in savings to fund a car purchase in 10 years?
Pro: Always steady contributions.
Con: Not maxing the IRA

I am thinking traditional IRA on Question #1 because it will allow her to get the tax deduction now and save a bit more. Given that she has a low income and not a high earning potential, she'll very likely be in a low tax bracket forever.

I am thinking Option A on Question #2 because time in the market is the most important factor, but I fear that B is easier because she can put it all on autopilot, never think about it, and have her next car money sitting in savings. She's not the type of person whose money burns a hole in her pocket, so I am not concerned with her spending it. I am concerned with having money sitting in savings for so long eroding away to inflation.

So, any glaring reason not to recommend a Traditional IRA and to max it out until a few years before the next car purchase is needed?
User avatar
retired@50
Posts: 12709
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Portfolio set-up for my sister-in-law

Post by retired@50 »

I'd use the Roth IRA at least until 2025 and see if the TCJA rates stay or go away. What used to be a 15% rate, dipped to 12% thanks to TCJA, but may be headed back up to 15% in 2026.

As far as the car goes, I certainly wouldn't save for a car for 10 years, but since the budget is tight, might prefer the reduced contribution closer to the car purchase, * OR * seek out a low financing rate or 0% loan. Every once in a while, the car companies offer financing incentives to boost sales. These can be a good source of low cost or zero cost debt for people on a tight budget.

https://www.fool.com/taxes/2017/12/03/s ... -2026.aspx

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Topic Author
Triple digit golfer
Posts: 10430
Joined: Mon May 18, 2009 5:57 pm

Re: Portfolio set-up for my sister-in-law

Post by Triple digit golfer »

retired@50 wrote: Mon Mar 02, 2020 1:26 pm I'd use the Roth IRA at least until 2025 and see if the TCJA rates stay or go away. What used to be a 15% rate, dipped to 12% thanks to TCJA, but may be headed back up to 15% in 2026.

As far as the car goes, I certainly wouldn't save for a car for 10 years, but since the budget is tight, might prefer the reduced contribution closer to the car purchase, * OR * seek out a low financing rate or 0% loan. Every once in a while, the car companies offer financing incentives to boost sales. These can be a good source of low cost or zero cost debt for people on a tight budget.

https://www.fool.com/taxes/2017/12/03/s ... -2026.aspx

Regards,
Thank you. Great perspective on the tax cuts and possibly increasing after they expire in 2026.
Carl53
Posts: 2687
Joined: Sun Mar 07, 2010 7:26 pm

Re: Portfolio set-up for my sister-in-law

Post by Carl53 »

I'd go with Roth to take advantage of the 12% brackets unless she can get her AGI down to $32000 by TIRA and other means to allow the Retirement Savers Credit to kick in. TIRA would be the only option to reduce her 2019 income. The most it would be worth to her is a $200 tax credit.
User avatar
Watty
Posts: 28813
Joined: Wed Oct 10, 2007 3:55 pm

Re: Portfolio set-up for my sister-in-law

Post by Watty »

Triple digit golfer wrote: Mon Mar 02, 2020 12:52 pm 1. Is a Roth or Traditional IRA the best option for her? She has no major upside to her earning potential, but reasonably good job security and/or ability to find another job paying the same. I was considering traditional because a) tax deduction now, b) she'll be able to get more into the account closer to the max and c) given that she has approximately a $0 net worth now, it's highly likely that she'll be in a low tax bracket in retirement.
I agree, especially since there is a reasonable chance that she will be married and filing tax returns in the lower joint tax brackets when she is retired. For example an over 65 couple can have $40K in Social Security and $20K in taxable income and pay no federal income taxes.
Triple digit golfer wrote: Mon Mar 02, 2020 12:52 pm 2. Given that she only has $6,000 annually to invest or save, which makes more sense?
A) Max the IRA and then 2-3 years before car purchase, stop contributing.
Pros: Maxing now
Con: Not contributing for two years later on
B) Don't max the IRA, and save the difference in savings to fund a car purchase in 10 years?
Pro: Always steady contributions.
Con: Not maxing the IRA
If she has a 401k match that would be the first thing to get.

I would suggest that she put $100(or so) a month into a seperate car fund and then put the rest into an IRA. This could also be used for things like big car repairs. Things like new tire or routine brake repairs are pretty predictable so she should not need to use her emergency fund for these.

She will may be able to qualify for at a partial Retirement Saving Contribution Credit so she should always put at least $2,000 into an IRA each year, including 2019 by April 15th. The income numbers on this web site are after a lot of payroll deductions so the modified income that counts will be less than her salary. As I recall 401k contributions would also reduce this modified income.

https://www.irs.gov/retirement-plans/pl ... ers-credit

Somewhere in her plans she may also want to save up a downpayment for a house so be sure to ask her about that.
Post Reply