Roth IRA what to invest in and how

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blwegrzyn
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Roth IRA what to invest in and how

Post by blwegrzyn »

I am trying to help a person to start an ROTH IRA with not a great income. (40K)
I basically helped them to open and ROTH IRA at fidelity.com and now i want to get them started so that can start saving some money for the retirement. They might be able to do first contribution of 3000-3500 and then do reoccurring by-weekly contributions and investments and hopefully try to much max allowed contributions.
Person that needs help is already 50 years old and no retirement plan at all.

I read this link:
https://www.bogleheads.org/wiki/Three-fund_portfolio
I wonder if the simple start would be simply using that money and distribute it in the Three-fund_portfolio?

I am aware that there are limits what u can purchase at the beginning.
Also not sure which Three-fund_portfolio to select as it seems like that link prioritizes the Vanguard?
When i search for low cost high return and high star morning star rating mutual funds i see different results then in examples in above link:

Looking for a quick help how to get them started with no unnecessary complexity.

Also, i wonder if using something like Fidelity Go would be also a good alternative start or it is not worth it?
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LadyGeek
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Re: Roth IRA what to invest in and how

Post by LadyGeek »

Welcome! On an administrative note, Roth is not an acronym. It's the name of a US senator. See: Roth IRA
Named after US Senator William Roth, Roth IRAs were established by the Taxpayer Relief Act of 1997.
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invest4
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Re: Roth IRA what to invest in and how

Post by invest4 »

Some initial comments:

* Why Roth vs 401k / other? Unless the portfolio was large (doesn't appear to be the case), my first thought is that given the income, pre-tax would be more advantageous?

* Otherwise, you have provided very little information thus far:

- Works for a company?

- Has any benefits?

- Emergency fund?

- What are annual expenses?

- Risk Tolerance?

- HSA?


If you want to help your friend, instead of "quick", I would focus more on "appropriate, simple, and enduring for the long term".

Best wishes.
Topic Author
blwegrzyn
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Re: Roth IRA what to invest in and how

Post by blwegrzyn »

* Why Roth vs 401k / other? Unless the portfolio was large (doesn't appear to be the case), my first thought is that given the income, pre-tax would be more advantageous?
So when they retire they dont have to pay taxes. Unless i am missing something and because of low income their taxes be non existent?

* Otherwise, you have provided very little information thus far:

- Works for a company?
Self-employeed. Cleaning.

- Has any benefits?
NO

- Emergency fund?
NONE

- What are annual expenses?

- Risk Tolerance?
Not sure how to approach this one, it seems like when you start at 50 and have no funds you must be at least moderate 5.(scale 1-10)

- HSA?
none

I hope this give little more info.
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retired@50
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Re: Roth IRA what to invest in and how

Post by retired@50 »

blwegrzyn wrote: Sun Jun 30, 2024 10:12 pm I am trying to help a person to start an ROTH IRA with not a great income. (40K)
I basically helped them to open and ROTH IRA at fidelity.com and now i want to get them started so that can start saving some money for the retirement. They might be able to do first contribution of 3000-3500 and then do reoccurring by-weekly contributions and investments and hopefully try to much max allowed contributions.
Person that needs help is already 50 years old and no retirement plan at all.

I read this link:
https://www.bogleheads.org/wiki/Three-fund_portfolio
I wonder if the simple start would be simply using that money and distribute it in the Three-fund_portfolio?

I am aware that there are limits what u can purchase at the beginning.
Also not sure which Three-fund_portfolio to select as it seems like that link prioritizes the Vanguard?
When i search for low cost high return and high star morning star rating mutual funds i see different results then in examples in above link:

Looking for a quick help how to get them started with no unnecessary complexity.

Also, i wonder if using something like Fidelity Go would be also a good alternative start or it is not worth it?
A Roth IRA at Fidelity is a good start.

For a simple approach, consider either the 3-fund portfolio you mention above using Fidelity funds.
FSKAX for US Stock
FTIHX for International Stock
FXNAX for US Bonds

Another possible approach would be a target date index fund, like the 2040 fund. Be careful here as the names can be deceptive.
The low-expense ratio Fidelity Freedom INDEX 2040 Fund is the one you'd want to recommend.
See link: https://fundresearch.fidelity.com/mutua ... /315793885

This one single fund will provide a mix of assets (US stock / International stock / bonds) all in a single investment "bucket". Just fill the bucket.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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retired@50
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Re: Roth IRA what to invest in and how

Post by retired@50 »

blwegrzyn wrote: Mon Jul 01, 2024 7:22 am ...
- Works for a company?
Self-employeed. Cleaning.

- Has any benefits?
NO

- Emergency fund?
NONE

- What are annual expenses?

- Risk Tolerance?
Not sure how to approach this one, it seems like when you start at 50 and have no funds you must be at least moderate 5.(scale 1-10)

- HSA?
none

I hope this give little more info.
The Emergency Fund (or lack thereof) should probably be addressed before retirement savings. When considering investment priorities, reviewing the list in the wiki may help.

See link: https://www.bogleheads.org/wiki/Priorit ... nvestments

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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Nate79
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Re: Roth IRA what to invest in and how

Post by Nate79 »

A low cost index based target date retirement fund is all they need within retirement accounts for someone that is not knowledgeable in investing.
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Johnnie
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Re: Roth IRA what to invest in and how

Post by Johnnie »

This person has two separate problems: No emergency fund, and no growth-oriented investments.

On the latter, he could do a whole lot worse than just sticking the whole growth allocation in the VG Total Market Fund, period. Simple and "clean."

~~~~~~

BTW, his other big challenge is to keep working as long as possible, rather than taking Social Security at 62. You might want to bring him up to speed on that challenge and opportunity. This outcome also affects his investment choices and decisions.
"I know nothing."
heyyou
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Re: Roth IRA what to invest in and how

Post by heyyou »

For someone new to investing, a mixed stock/bond fund would partially buffer the inevitable stock price fluctuations, but with lower long term performance, so maybe look for an 80/20 or 70/30 fund. An alternative would be to split the annual contributions to just partially fill both tIRA and RIRA up to their combined annual limit, if that is not too complicated for the new investor. There are minimum opening account sizes that may require a pair of sequential years to get both accounts started, before switching to the combined partial contributions.

My best investing mindset was to just decide that I had a good enough car, good enough house, good enough toys, etc. so any income beyond my necessary expenses went into savings.
Topic Author
blwegrzyn
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Re: Roth IRA what to invest in and how

Post by blwegrzyn »

Image
retired@50 wrote: Mon Jul 01, 2024 8:35 am
blwegrzyn wrote: Sun Jun 30, 2024 10:12 pm I am trying to help a person to start an ROTH IRA with not a great income. (40K)
I basically helped them to open and ROTH IRA at fidelity.com and now i want to get them started so that can start saving some money for the retirement. They might be able to do first contribution of 3000-3500 and then do reoccurring by-weekly contributions and investments and hopefully try to much max allowed contributions.
Person that needs help is already 50 years old and no retirement plan at all.

I read this link:
https://www.bogleheads.org/wiki/Three-fund_portfolio
I wonder if the simple start would be simply using that money and distribute it in the Three-fund_portfolio?

I am aware that there are limits what u can purchase at the beginning.
Also not sure which Three-fund_portfolio to select as it seems like that link prioritizes the Vanguard?
When i search for low cost high return and high star morning star rating mutual funds i see different results then in examples in above link:

Looking for a quick help how to get them started with no unnecessary complexity.

Also, i wonder if using something like Fidelity Go would be also a good alternative start or it is not worth it?
A Roth IRA at Fidelity is a good start.

For a simple approach, consider either the 3-fund portfolio you mention above using Fidelity funds.
FSKAX for US Stock
FTIHX for International Stock
FXNAX for US Bonds

Another possible approach would be a target date index fund, like the 2040 fund. Be careful here as the names can be deceptive.
The low-expense ratio Fidelity Freedom INDEX 2040 Fund is the one you'd want to recommend.
See link: https://fundresearch.fidelity.com/mutua ... /315793885

This one single fund will provide a mix of assets (US stock / International stock / bonds) all in a single investment "bucket". Just fill the bucket.

Regards,
So you mention both approaches either 3-fund or Year fund. Is there really any difference here when we talk such a small funds?
I want to make sure to get the person best start possible if that is even doable.
If i would go with 3-fun approach what is the best way to split it?

Also, when i look at comparison for those funds some have higher rate of return etc then others yet i found this link mentioning the best:
https://www.morningstar.com/funds/best- ... funds-2024

Not sure how reliable this is?
Should i just go with the one that has highest rate of return?

https://fundresearch.fidelity.com/fund- ... LX%2CLIKIX
Topic Author
blwegrzyn
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Re: Roth IRA what to invest in and how

Post by blwegrzyn »

Johnnie wrote: Mon Jul 01, 2024 9:49 am This person has two separate problems: No emergency fund, and no growth-oriented investments.

On the latter, he could do a whole lot worse than just sticking the whole growth allocation in the VG Total Market Fund, period. Simple and "clean."

~~~~~~

BTW, his other big challenge is to keep working as long as possible, rather than taking Social Security at 62. You might want to bring him up to speed on that challenge and opportunity. This outcome also affects his investment choices and decisions.
Are you referring to this one [edit]: VTSMX ? You mean invest everything in it?
Last edited by blwegrzyn on Mon Jul 01, 2024 10:17 am, edited 1 time in total.
ReadyOrNot
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Re: Roth IRA what to invest in and how

Post by ReadyOrNot »

We really don't know enough about this person's situation If this person pays income tax on the $40k, using a traditional IRA might lower AGI enough to qualify for the saver's credit.
An unsophisticated saver might panic at 50% drop in stock market or even sudden 20% in bonds. Then maybe even a safe money market account paying 5% per year might be better for a year or two, then maybe a target date fund after learning some more.
Will this person get Social Security and Medicare?
Last edited by ReadyOrNot on Mon Jul 01, 2024 10:12 am, edited 2 times in total.
Topic Author
blwegrzyn
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Re: Roth IRA what to invest in and how

Post by blwegrzyn »

heyyou wrote: Mon Jul 01, 2024 9:51 am For someone new to investing, a mixed stock/bond fund would partially buffer the inevitable stock price fluctuations, but with lower long term performance, so maybe look for an 80/20 or 70/30 fund. An alternative would be to split the annual contributions to just partially fill both tIRA and RIRA up to their combined annual limit, if that is not too complicated for the new investor. There are minimum opening account sizes that may require a pair of sequential years to get both accounts started, before switching to the combined partial contributions.

My best investing mindset was to just decide that I had a good enough car, good enough house, good enough toys, etc. so any income beyond my necessary expenses went into savings.
thx trying to select something so person can get started. THey have limited emergency savings. Maybe like 4000-5000K.
Topic Author
blwegrzyn
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Re: Roth IRA what to invest in and how

Post by blwegrzyn »

ReadyOrNot wrote: Mon Jul 01, 2024 10:10 am We really don't know enough about this person's situation If this person oays income tax on the $40k, using a traditional IRA might lower AGI enough to qualify for the saver's credit.
An unsophisticated saver might panic at 50% drop in stock market or even sudden 20% in bonds. Then maybe even a safe money market account paying 5% per year might be better for a year or two, then maybe a target date fund after learning some more.
Will this person get Social Security and Medicare?
The person came late to states and was on student visa for very long time so could not do SS. Just recently started to pay taxes.
So probably with such a low AGI retirement might be around 1000-1200K, this is why the person is looking to save a little more that's why Retirement account idea. Might get some help with fund from parents to try to at least maximize contributors.
ReadyOrNot
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Re: Roth IRA what to invest in and how

Post by ReadyOrNot »

I guess there is time to get some Social Security (at least 40 quarters or 10 years paying Social Security tax), and Medicare. One could survive with subsidized housing, SNAP, food bank.
Topic Author
blwegrzyn
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Re: Roth IRA what to invest in and how

Post by blwegrzyn »

ReadyOrNot wrote: Mon Jul 01, 2024 11:40 am I guess there is time to get some Social Security (at least 40 quarters or 10 years paying Social Security tax), and Medicare. One could survive with subsidized housing, SNAP, food bank.
thats the plan but i think it would be worth adding some retirement plan to it.
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FiveK
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Re: Roth IRA what to invest in and how

Post by FiveK »

blwegrzyn wrote: Mon Jul 01, 2024 10:16 am So probably with such a low AGI retirement might be around 1000-1200K....
That looks like $1 million to $1.2 million. Is that what you mean?
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blwegrzyn
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Re: Roth IRA what to invest in and how

Post by blwegrzyn »

FiveK wrote: Mon Jul 01, 2024 12:51 pm
blwegrzyn wrote: Mon Jul 01, 2024 10:16 am So probably with such a low AGI retirement might be around 1000-1200K....
That looks like $1 million to $1.2 million. Is that what you mean?
sorry i meant 1000$ -1200$ monthly.
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FiveK
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Re: Roth IRA what to invest in and how

Post by FiveK »

blwegrzyn wrote: Mon Jul 01, 2024 1:05 pm
FiveK wrote: Mon Jul 01, 2024 12:51 pm
blwegrzyn wrote: Mon Jul 01, 2024 10:16 am So probably with such a low AGI retirement might be around 1000-1200K....
That looks like $1 million to $1.2 million. Is that what you mean?
sorry i meant 1000$ -1200$ monthly.
Thanks for clarifying. In that case, note this recommendation in the Traditional versus Roth wiki article (emphasis added):
If you can contribute to Roth accounts today at 12% or less, it is usually a good idea as this is a historically low tax rate - especially if you are far from retirement...Only defer taxes at 12% or less if you are close to withdrawal and are very confident you will be able to withdraw at a lower rate.
At a quick glance, it appears the highlighted phrase is the one that should apply here. Is that how you see it also?
FinancialDave
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Re: Roth IRA what to invest in and how

Post by FinancialDave »

FiveK wrote: Mon Jul 01, 2024 2:06 pm
blwegrzyn wrote: Mon Jul 01, 2024 1:05 pm
FiveK wrote: Mon Jul 01, 2024 12:51 pm
blwegrzyn wrote: Mon Jul 01, 2024 10:16 am So probably with such a low AGI retirement might be around 1000-1200K....
That looks like $1 million to $1.2 million. Is that what you mean?
sorry i meant 1000$ -1200$ monthly.
Thanks for clarifying. In that case, note this recommendation in the Traditional versus Roth wiki article (emphasis added):
If you can contribute to Roth accounts today at 12% or less, it is usually a good idea as this is a historically low tax rate - especially if you are far from retirement...Only defer taxes at 12% or less if you are close to withdrawal and are very confident you will be able to withdraw at a lower rate.
At a quick glance, it appears the highlighted phrase is the one that should apply here. Is that how you see it also?
To be clear are you saying deferred is best choice here and not Roth IRA, because that is what I think.

With estimated SS @ $12k and withdrawals from Traditional IRA of around $11k, with this person working until age 70, does not even get out of the 10% tax bracket at today's dollars. Not sure this person can afford $4k per year after-tax, but $4k per year pre-tax is easier to do and goes farther, in most any scenario, except windfall inheritance or change in jobs. Maybe working until 70 gets better SS??
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Re: Roth IRA what to invest in and how

Post by firebirdparts »

If the person is just going to do what you say, then just auto-invest everything in SPY.

If they are going to look at it and worry, auto-invest everything in a single fund portfolio like a target date fund.
This time is the same
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blwegrzyn
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Re: Roth IRA what to invest in and how

Post by blwegrzyn »

FinancialDave wrote: Mon Jul 01, 2024 2:52 pm
FiveK wrote: Mon Jul 01, 2024 2:06 pm
blwegrzyn wrote: Mon Jul 01, 2024 1:05 pm
FiveK wrote: Mon Jul 01, 2024 12:51 pm
blwegrzyn wrote: Mon Jul 01, 2024 10:16 am So probably with such a low AGI retirement might be around 1000-1200K....
That looks like $1 million to $1.2 million. Is that what you mean?
sorry i meant 1000$ -1200$ monthly.
Thanks for clarifying. In that case, note this recommendation in the Traditional versus Roth wiki article (emphasis added):
If you can contribute to Roth accounts today at 12% or less, it is usually a good idea as this is a historically low tax rate - especially if you are far from retirement...Only defer taxes at 12% or less if you are close to withdrawal and are very confident you will be able to withdraw at a lower rate.
At a quick glance, it appears the highlighted phrase is the one that should apply here. Is that how you see it also?
To be clear are you saying deferred is best choice here and not Roth IRA, because that is what I think.

With estimated SS @ $12k and withdrawals from Traditional IRA of around $11k, with this person working until age 70, does not even get out of the 10% tax bracket at today's dollars. Not sure this person can afford $4k per year after-tax, but $4k per year pre-tax is easier to do and goes farther, in most any scenario, except windfall inheritance or change in jobs. Maybe working until 70 gets better SS??
I though the same that its better to pay it now then later when situation might be even worse and person wont be able to afford to pay for taxes.
So, just though to start with basic Roth IRA try to maximize the contribututions and hope for the best. Question was what to invest into:
3-fund portfolio
target date
or start with like Fidelity® Large Cap Growth Index Fund (FSPGX) for some time and then transfer money to target date fund?
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FiveK
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Re: Roth IRA what to invest in and how

Post by FiveK »

blwegrzyn wrote: Mon Jul 01, 2024 3:14 pm
FinancialDave wrote: Mon Jul 01, 2024 2:52 pm
FiveK wrote: Mon Jul 01, 2024 2:06 pm
blwegrzyn wrote: Mon Jul 01, 2024 1:05 pm
FiveK wrote: Mon Jul 01, 2024 12:51 pm That looks like $1 million to $1.2 million. Is that what you mean?
sorry i meant 1000$ -1200$ monthly.
Thanks for clarifying. In that case, note this recommendation in the Traditional versus Roth wiki article (emphasis added):
If you can contribute to Roth accounts today at 12% or less, it is usually a good idea as this is a historically low tax rate - especially if you are far from retirement...Only defer taxes at 12% or less if you are close to withdrawal and are very confident you will be able to withdraw at a lower rate.
At a quick glance, it appears the highlighted phrase is the one that should apply here. Is that how you see it also?
To be clear are you saying deferred is best choice here and not Roth IRA, because that is what I think.

With estimated SS @ $12k and withdrawals from Traditional IRA of around $11k, with this person working until age 70, does not even get out of the 10% tax bracket at today's dollars. Not sure this person can afford $4k per year after-tax, but $4k per year pre-tax is easier to do and goes farther, in most any scenario, except windfall inheritance or change in jobs. Maybe working until 70 gets better SS??
I though the same that its better to pay it now then later when situation might be even worse and person wont be able to afford to pay for taxes.
So, just though to start with basic Roth IRA try to maximize the contribututions and hope for the best. Question was what to invest into:
3-fund portfolio
target date
or start with like Fidelity® Large Cap Growth Index Fund (FSPGX) for some time and then transfer money to target date fund?
I think both FD and I are saying "use traditional, not Roth" because it appears that in retirement
a) none of any SS benefits will be taxable, and
b) other income will be less than the standard deduction, so
no federal income tax will be due at all.

Thus there is good reason to take the tax deduction on traditional contributions now, and never pay tax on the traditional withdrawals in retirement. The highlighted assumption above is key to this decision, so if there is reason to expect otherwise....
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blwegrzyn
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Re: Roth IRA what to invest in and how

Post by blwegrzyn »

FiveK wrote: Mon Jul 01, 2024 4:14 pm
blwegrzyn wrote: Mon Jul 01, 2024 3:14 pm
FinancialDave wrote: Mon Jul 01, 2024 2:52 pm
FiveK wrote: Mon Jul 01, 2024 2:06 pm
blwegrzyn wrote: Mon Jul 01, 2024 1:05 pm
sorry i meant 1000$ -1200$ monthly.
Thanks for clarifying. In that case, note this recommendation in the Traditional versus Roth wiki article (emphasis added):
If you can contribute to Roth accounts today at 12% or less, it is usually a good idea as this is a historically low tax rate - especially if you are far from retirement...Only defer taxes at 12% or less if you are close to withdrawal and are very confident you will be able to withdraw at a lower rate.
At a quick glance, it appears the highlighted phrase is the one that should apply here. Is that how you see it also?
To be clear are you saying deferred is best choice here and not Roth IRA, because that is what I think.

With estimated SS @ $12k and withdrawals from Traditional IRA of around $11k, with this person working until age 70, does not even get out of the 10% tax bracket at today's dollars. Not sure this person can afford $4k per year after-tax, but $4k per year pre-tax is easier to do and goes farther, in most any scenario, except windfall inheritance or change in jobs. Maybe working until 70 gets better SS??
I though the same that its better to pay it now then later when situation might be even worse and person wont be able to afford to pay for taxes.
So, just though to start with basic Roth IRA try to maximize the contribututions and hope for the best. Question was what to invest into:
3-fund portfolio
target date
or start with like Fidelity® Large Cap Growth Index Fund (FSPGX) for some time and then transfer money to target date fund?
I think both FD and I are saying "use traditional, not Roth" because it appears that in retirement
a) none of any SS benefits will be taxable, and
b) other income will be less than the standard deduction, so
no federal income tax will be due at all.

Thus there is good reason to take the tax deduction on traditional contributions now, and never pay tax on the traditional withdrawals in retirement. The highlighted assumption above is key to this decision, so if there is reason to expect otherwise....
Do you mean 401k when you say traditional or just traditional IRA?
So if i understand correctly with traditional it will be tax deductible and no taxes paid now.
And and later because total from SS and traditional wont be as high there will be not enough income for it to be taxable so in general no tax will be paid?
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FiveK
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Re: Roth IRA what to invest in and how

Post by FiveK »

blwegrzyn wrote: Mon Jul 01, 2024 4:24 pm Do you mean 401k when you say traditional or just traditional IRA?
So if i understand correctly with traditional it will be tax deductible and no taxes paid now.
And and later because total from SS and traditional wont be as high there will be not enough income for it to be taxable so in general no tax will be paid?
"Traditional" meaning pre-tax, and applicable to both 401k and IRA. As opposed to "Roth" meaning after-tax, and applicable to both 401k and IRA.

See Traditional versus Roth, and the 'Basic Terms' tab of the personal finance toolbox spreadsheet.

Yes, you understand the logic correctly. Traditional 401k contributions reduce the amount reported on a W-2 so those amounts never appear on a tax return at all. Traditional IRA contributions are subtracted on Schedule 1, reducing adjusted gross income and thus taxable income.
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blwegrzyn
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Re: Roth IRA what to invest in and how

Post by blwegrzyn »

FiveK wrote: Mon Jul 01, 2024 5:02 pm
blwegrzyn wrote: Mon Jul 01, 2024 4:24 pm Do you mean 401k when you say traditional or just traditional IRA?
So if i understand correctly with traditional it will be tax deductible and no taxes paid now.
And and later because total from SS and traditional wont be as high there will be not enough income for it to be taxable so in general no tax will be paid?
"Traditional" meaning pre-tax, and applicable to both 401k and IRA. As opposed to "Roth" meaning after-tax, and applicable to both 401k and IRA.

See Traditional versus Roth, and the 'Basic Terms' tab of the personal finance toolbox spreadsheet.

Yes, you understand the logic correctly. Traditional 401k contributions reduce the amount reported on a W-2 so those amounts never appear on a tax return at all. Traditional IRA contributions are subtracted on Schedule 1, reducing adjusted gross income and thus taxable income.
So if traditional IRA reduced AGI this means SS benefits would be reduced also as this is what they look at when counting retirement, i think?
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FiveK
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Re: Roth IRA what to invest in and how

Post by FiveK »

blwegrzyn wrote: Mon Jul 01, 2024 5:05 pm So if traditional IRA reduced AGI this means SS benefits would be reduced also as this is what they look at when counting retirement, i think?
No. FICA salary/wages are completely unaffected by either 401k or IRA contributions.
FinancialDave
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Re: Roth IRA what to invest in and how

Post by FinancialDave »

blwegrzyn wrote: Mon Jul 01, 2024 5:05 pm
FiveK wrote: Mon Jul 01, 2024 5:02 pm
blwegrzyn wrote: Mon Jul 01, 2024 4:24 pm Do you mean 401k when you say traditional or just traditional IRA?
So if i understand correctly with traditional it will be tax deductible and no taxes paid now.
And and later because total from SS and traditional wont be as high there will be not enough income for it to be taxable so in general no tax will be paid?
"Traditional" meaning pre-tax, and applicable to both 401k and IRA. As opposed to "Roth" meaning after-tax, and applicable to both 401k and IRA.

See Traditional versus Roth, and the 'Basic Terms' tab of the personal finance toolbox spreadsheet.

Yes, you understand the logic correctly. Traditional 401k contributions reduce the amount reported on a W-2 so those amounts never appear on a tax return at all. Traditional IRA contributions are subtracted on Schedule 1, reducing adjusted gross income and thus taxable income.
So if traditional IRA reduced AGI this means SS benefits would be reduced also as this is what they look at when counting retirement, i think?
Does person really have access to 401k? You said he was self-employed. At this level of income I'm not thinking he has a 401k??

If so, options are Traditional IRA, or Roth IRA.

For self-employed:

https://www.ssa.gov/pubs/EN-05-10022.pdf

"Net earnings for Social Security are your gross earnings
from your trade or business, minus your allowable
business deductions and depreciation."

In other words, whether you contribute to TIRA (traqditiional IRA) or Roth IRA makes no difference to your SS work history.
I love simulated data. It turns the impossible into the possible!
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retired@50
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Re: Roth IRA what to invest in and how

Post by retired@50 »

blwegrzyn wrote: Mon Jul 01, 2024 10:04 am Image
retired@50 wrote: Mon Jul 01, 2024 8:35 am
blwegrzyn wrote: Sun Jun 30, 2024 10:12 pm I am trying to help a person to start an ROTH IRA with not a great income. (40K)
I basically helped them to open and ROTH IRA at fidelity.com and now i want to get them started so that can start saving some money for the retirement. They might be able to do first contribution of 3000-3500 and then do reoccurring by-weekly contributions and investments and hopefully try to much max allowed contributions.
Person that needs help is already 50 years old and no retirement plan at all.

I read this link:
https://www.bogleheads.org/wiki/Three-fund_portfolio
I wonder if the simple start would be simply using that money and distribute it in the Three-fund_portfolio?

I am aware that there are limits what u can purchase at the beginning.
Also not sure which Three-fund_portfolio to select as it seems like that link prioritizes the Vanguard?
When i search for low cost high return and high star morning star rating mutual funds i see different results then in examples in above link:

Looking for a quick help how to get them started with no unnecessary complexity.

Also, i wonder if using something like Fidelity Go would be also a good alternative start or it is not worth it?
A Roth IRA at Fidelity is a good start.

For a simple approach, consider either the 3-fund portfolio you mention above using Fidelity funds.
FSKAX for US Stock
FTIHX for International Stock
FXNAX for US Bonds

Another possible approach would be a target date index fund, like the 2040 fund. Be careful here as the names can be deceptive.
The low-expense ratio Fidelity Freedom INDEX 2040 Fund is the one you'd want to recommend.
See link: https://fundresearch.fidelity.com/mutua ... /315793885

This one single fund will provide a mix of assets (US stock / International stock / bonds) all in a single investment "bucket". Just fill the bucket.

Regards,
So you mention both approaches either 3-fund or Year fund. Is there really any difference here when we talk such a small funds?
I want to make sure to get the person best start possible if that is even doable.
If i would go with 3-fun approach what is the best way to split it?

Also, when i look at comparison for those funds some have higher rate of return etc then others yet i found this link mentioning the best:
https://www.morningstar.com/funds/best- ... funds-2024

Not sure how reliable this is?
Should i just go with the one that has highest rate of return?

https://fundresearch.fidelity.com/fund- ... LX%2CLIKIX
The "best start possible" is a little hard to live up to.

Since using a target date fund will already have an asset allocation (and a retirement glide path) built in, I'd suggest this route for your friend. These funds are globally diversified, low cost, and will adjust to a more conservative position as retirement nears.

Shopping around for another out-performing fund mix is a waste of time in my opinion. Past performance doesn't guarantee any future result.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
Mikosan
Posts: 20
Joined: Sun Feb 19, 2023 10:55 pm

Re: Roth IRA what to invest in and how

Post by Mikosan »

At $40,000 in income, after the standard deduction, you're in such a low tax bracket that it makes total sense to ho the Roth route. From that point on, all that money and growth is theirs. At age 50, given they have little to nothing, ithink I'd just get them set up in a target date fund and let them pick it. They need to know the what and why of what they are doing. The best time to start was 30 yrs ago. The next best time to start is today.
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FiveK
Posts: 16346
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth IRA what to invest in and how

Post by FiveK »

Mikosan wrote: Mon Jul 01, 2024 9:20 pm At $40,000 in income, after the standard deduction, you're in such a low tax bracket that it makes total sense to ho the Roth route.
Low is still more than zero. If the expectation is paying 0% in retirement, why pay >0% now for any IRA?

Note that "any" can include either a SEP or SIMPLE IRA (due to self-employment) in addition to a "regular" traditional IRA.
FinancialDave
Posts: 1824
Joined: Thu May 26, 2011 9:36 pm

Re: Roth IRA what to invest in and how

Post by FinancialDave »

Mikosan wrote: Mon Jul 01, 2024 9:20 pm At $40,000 in income, after the standard deduction, you're in such a low tax bracket that it makes total sense to ho the Roth route. From that point on, all that money and growth is theirs. At age 50, given they have little to nothing, ithink I'd just get them set up in a target date fund and let them pick it. They need to know the what and why of what they are doing. The best time to start was 30 yrs ago. The next best time to start is today.
I am assuming this person is single and at age 50 he can't afford to waste extra money in converting pre-tax income from his job to after-tax spendable income. In other words, "savings" is finite and so saving pre-tax money allows him to save more!

Second, we know the marginal tax of $40k income now is 12% maybe going to 15%, but definitely greater than 10% or less in retirement, which favors saving traditional money, rather than saving Roth and being in the zero percent tax bracket in retirement and spending after-tax money that already had 12% or more taken on the front end (thus less savings).

In most cases if you find yourself in retirement in the zero percent bracket and no traditional IRA to spend in this zero percent bracket - you have wasted some amount of money. The question you have to ask yourself is does it matter. In this case for this investor I think it does matter because every dollar is going to count, especially after subtracting SE tax from his wages besides the Federal tax --- is there a State tax involved?
I love simulated data. It turns the impossible into the possible!
Topic Author
blwegrzyn
Posts: 30
Joined: Sun Jun 30, 2024 9:46 pm

Re: Roth IRA what to invest in and how

Post by blwegrzyn »

retired@50 wrote: Mon Jul 01, 2024 5:28 pm
blwegrzyn wrote: Mon Jul 01, 2024 10:04 am Image
retired@50 wrote: Mon Jul 01, 2024 8:35 am
blwegrzyn wrote: Sun Jun 30, 2024 10:12 pm I am trying to help a person to start an ROTH IRA with not a great income. (40K)
I basically helped them to open and ROTH IRA at fidelity.com and now i want to get them started so that can start saving some money for the retirement. They might be able to do first contribution of 3000-3500 and then do reoccurring by-weekly contributions and investments and hopefully try to much max allowed contributions.
Person that needs help is already 50 years old and no retirement plan at all.

I read this link:
https://www.bogleheads.org/wiki/Three-fund_portfolio
I wonder if the simple start would be simply using that money and distribute it in the Three-fund_portfolio?

I am aware that there are limits what u can purchase at the beginning.
Also not sure which Three-fund_portfolio to select as it seems like that link prioritizes the Vanguard?
When i search for low cost high return and high star morning star rating mutual funds i see different results then in examples in above link:

Looking for a quick help how to get them started with no unnecessary complexity.

Also, i wonder if using something like Fidelity Go would be also a good alternative start or it is not worth it?
A Roth IRA at Fidelity is a good start.

For a simple approach, consider either the 3-fund portfolio you mention above using Fidelity funds.
FSKAX for US Stock
FTIHX for International Stock
FXNAX for US Bonds

Another possible approach would be a target date index fund, like the 2040 fund. Be careful here as the names can be deceptive.
The low-expense ratio Fidelity Freedom INDEX 2040 Fund is the one you'd want to recommend.
See link: https://fundresearch.fidelity.com/mutua ... /315793885

This one single fund will provide a mix of assets (US stock / International stock / bonds) all in a single investment "bucket". Just fill the bucket.

Regards,
So you mention both approaches either 3-fund or Year fund. Is there really any difference here when we talk such a small funds?
I want to make sure to get the person best start possible if that is even doable.
If i would go with 3-fun approach what is the best way to split it?

Also, when i look at comparison for those funds some have higher rate of return etc then others yet i found this link mentioning the best:
https://www.morningstar.com/funds/best- ... funds-2024

Not sure how reliable this is?
Should i just go with the one that has highest rate of return?

https://fundresearch.fidelity.com/fund- ... LX%2CLIKIX
The "best start possible" is a little hard to live up to.

Since using a target date fund will already have an asset allocation (and a retirement glide path) built in, I'd suggest this route for your friend. These funds are globally diversified, low cost, and will adjust to a more conservative position as retirement nears.

Shopping around for another out-performing fund mix is a waste of time in my opinion. Past performance doesn't guarantee any future result.

Regards,
retired@50 wrote: Mon Jul 01, 2024 5:28 pm
blwegrzyn wrote: Mon Jul 01, 2024 10:04 am Image
retired@50 wrote: Mon Jul 01, 2024 8:35 am
blwegrzyn wrote: Sun Jun 30, 2024 10:12 pm I am trying to help a person to start an ROTH IRA with not a great income. (40K)
I basically helped them to open and ROTH IRA at fidelity.com and now i want to get them started so that can start saving some money for the retirement. They might be able to do first contribution of 3000-3500 and then do reoccurring by-weekly contributions and investments and hopefully try to much max allowed contributions.
Person that needs help is already 50 years old and no retirement plan at all.

I read this link:
https://www.bogleheads.org/wiki/Three-fund_portfolio
I wonder if the simple start would be simply using that money and distribute it in the Three-fund_portfolio?

I am aware that there are limits what u can purchase at the beginning.
Also not sure which Three-fund_portfolio to select as it seems like that link prioritizes the Vanguard?
When i search for low cost high return and high star morning star rating mutual funds i see different results then in examples in above link:

Looking for a quick help how to get them started with no unnecessary complexity.

Also, i wonder if using something like Fidelity Go would be also a good alternative start or it is not worth it?
A Roth IRA at Fidelity is a good start.

For a simple approach, consider either the 3-fund portfolio you mention above using Fidelity funds.
FSKAX for US Stock
FTIHX for International Stock
FXNAX for US Bonds

Another possible approach would be a target date index fund, like the 2040 fund. Be careful here as the names can be deceptive.
The low-expense ratio Fidelity Freedom INDEX 2040 Fund is the one you'd want to recommend.
See link: https://fundresearch.fidelity.com/mutua ... /315793885

This one single fund will provide a mix of assets (US stock / International stock / bonds) all in a single investment "bucket". Just fill the bucket.

Regards,
So you mention both approaches either 3-fund or Year fund. Is there really any difference here when we talk such a small funds?
I want to make sure to get the person best start possible if that is even doable.
If i would go with 3-fun approach what is the best way to split it?

Also, when i look at comparison for those funds some have higher rate of return etc then others yet i found this link mentioning the best:
https://www.morningstar.com/funds/best- ... funds-2024

Not sure how reliable this is?
Should i just go with the one that has highest rate of return?

https://fundresearch.fidelity.com/fund- ... LX%2CLIKIX
The "best start possible" is a little hard to live up to.

Since using a target date fund will already have an asset allocation (and a retirement glide path) built in, I'd suggest this route for your friend. These funds are globally diversified, low cost, and will adjust to a more conservative position as retirement nears.

Shopping around for another out-performing fund mix is a waste of time in my opinion. Past performance doesn't guarantee any future result.

Regards,
So it seems to me from all the comments above, i should advice that person to open additional traditional IRA (they will have both traditional and roth) and start in traditional IRA with initial contribution, we looking at 3000-4000 and allocate that to Target Date Fund and i was thinking to select recommended earlier Fidelity Freedom® Index 2040 Fund Investor Class or some other Target Date fund.
Seems like that would work better then 3-fund strategy?
User avatar
retired@50
Posts: 13947
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Roth IRA what to invest in and how

Post by retired@50 »

blwegrzyn wrote: Mon Jul 01, 2024 10:17 pm
retired@50 wrote: Mon Jul 01, 2024 5:28 pm
blwegrzyn wrote: Mon Jul 01, 2024 10:04 am Image
retired@50 wrote: Mon Jul 01, 2024 8:35 am
blwegrzyn wrote: Sun Jun 30, 2024 10:12 pm I am trying to help a person to start an ROTH IRA with not a great income. (40K)
I basically helped them to open and ROTH IRA at fidelity.com and now i want to get them started so that can start saving some money for the retirement. They might be able to do first contribution of 3000-3500 and then do reoccurring by-weekly contributions and investments and hopefully try to much max allowed contributions.
Person that needs help is already 50 years old and no retirement plan at all.

I read this link:
https://www.bogleheads.org/wiki/Three-fund_portfolio
I wonder if the simple start would be simply using that money and distribute it in the Three-fund_portfolio?

I am aware that there are limits what u can purchase at the beginning.
Also not sure which Three-fund_portfolio to select as it seems like that link prioritizes the Vanguard?
When i search for low cost high return and high star morning star rating mutual funds i see different results then in examples in above link:

Looking for a quick help how to get them started with no unnecessary complexity.

Also, i wonder if using something like Fidelity Go would be also a good alternative start or it is not worth it?
A Roth IRA at Fidelity is a good start.

For a simple approach, consider either the 3-fund portfolio you mention above using Fidelity funds.
FSKAX for US Stock
FTIHX for International Stock
FXNAX for US Bonds

Another possible approach would be a target date index fund, like the 2040 fund. Be careful here as the names can be deceptive.
The low-expense ratio Fidelity Freedom INDEX 2040 Fund is the one you'd want to recommend.
See link: https://fundresearch.fidelity.com/mutua ... /315793885

This one single fund will provide a mix of assets (US stock / International stock / bonds) all in a single investment "bucket". Just fill the bucket.

Regards,
So you mention both approaches either 3-fund or Year fund. Is there really any difference here when we talk such a small funds?
I want to make sure to get the person best start possible if that is even doable.
If i would go with 3-fun approach what is the best way to split it?

Also, when i look at comparison for those funds some have higher rate of return etc then others yet i found this link mentioning the best:
https://www.morningstar.com/funds/best- ... funds-2024

Not sure how reliable this is?
Should i just go with the one that has highest rate of return?

https://fundresearch.fidelity.com/fund- ... LX%2CLIKIX
The "best start possible" is a little hard to live up to.

Since using a target date fund will already have an asset allocation (and a retirement glide path) built in, I'd suggest this route for your friend. These funds are globally diversified, low cost, and will adjust to a more conservative position as retirement nears.

Shopping around for another out-performing fund mix is a waste of time in my opinion. Past performance doesn't guarantee any future result.

Regards,
So it seems to me from all the comments above, i should advice that person to open additional traditional IRA (they will have both traditional and roth) and start in traditional IRA with initial contribution, we looking at 3000-4000 and allocate that to Target Date Fund and i was thinking to select recommended earlier Fidelity Freedom® Index 2040 Fund Investor Class or some other Target Date fund.
Seems like that would work better then 3-fund strategy?
Keep in mind that one can still only contribute the annual number $7,000 for under 50, or $8,000 for over 50 whether it's traditional or Roth. You could put some money in each, but still aren't allowed to exceed the annual limit.

Source: https://www.fidelity.com/learning-cente ... ion-limits

Also, since this person appears to have an income of $40K, they might be eligible for the Saver's Credit. I'm not certain what the income limit is, or if the wiki page is fully up to date, so you may want to look a bit deeper into that.
See the wiki: https://www.bogleheads.org/wiki/Saver%27s_credit

Edit: It appears that using a Traditional IRA will actually help with the saver's credit because the Traditional IRA will lower their AGI, which is important in establishing eligibility for the credit.

Regards,
Last edited by retired@50 on Mon Jul 01, 2024 11:22 pm, edited 1 time in total.
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
dorster
Posts: 372
Joined: Tue Aug 15, 2017 4:20 pm

Re: Roth IRA what to invest in and how

Post by dorster »

blwegrzyn wrote: Mon Jul 01, 2024 7:22 am * Why Roth vs 401k / other? Unless the portfolio was large (doesn't appear to be the case), my first thought is that given the income, pre-tax would be more advantageous?
So when they retire they dont have to pay taxes. Unless i am missing something and because of low income their taxes be non existent?
While they are working they are paying income tax. Presumably at least at the 10 or 12% marginal rate.

When they retire they will no longer have any earned income. Their marginal tax rate would be 0%.

Unless you are not disclosing something about your friend, they should be contributing to a traditional IRA while working. This will result in them having 10-12% more retirement savings than if they make Roth contributions (all else equal).

Once retired they can withdraw up to the standard deduction tax-free. Social security is taxed favorably and unlikely to change this (unless they had a very high-paying career for many years before working as a cleaner).
User avatar
FiveK
Posts: 16346
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth IRA what to invest in and how

Post by FiveK »

blwegrzyn wrote: Mon Jul 01, 2024 10:17 pm So it seems to me from all the comments above, i should advice that person to open additional traditional IRA
Yes.
(they will have both traditional and roth)
That's OK. In fact, putting a small amount (e.g., $50) into the Roth IRA to start the "five year clock" (see the Five years or more since opening first Roth IRA column) would be fine.
, and start in traditional IRA with initial contribution, we looking at 3000-4000 and allocate that to Target Date Fund and i was thinking to select recommended earlier Fidelity Freedom® Index 2040 Fund Investor Class
That would be fine.
Seems like that would work better then 3-fund strategy?
Whatever is chosen is unlikely to have been the "best" in hindsight. That's life. But that one is a reasonable choice.
User avatar
FiveK
Posts: 16346
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth IRA what to invest in and how

Post by FiveK »

retired@50 wrote: Mon Jul 01, 2024 10:43 pm Keep in mind that one can still only contribute the annual number $7,000 for under 50, or $8,000 for over 50 whether it's traditional or Roth. You could put some money in each, but still aren't allowed to exceed the annual limit.
That applies to "regular" IRAs, and may or may not be more than the person can comfortably contribute. If more contributions are doable, consider opening a SEP or SIMPLE IRA.
Also, since this person appears to have an income of $40K, they might be eligible for the Saver's Credit.
Yes, the 10% tier starts at AGI <$37.5K. With the 1/2 SE tax deduction, and a presumed Self-Employed Health Insurance deduction, that AGI will be reached even before tIRA contributions reduce AGI further.

The first $2K will save 10% + 12%*(1-20%) = 19.6% (the 20% is due to how the QBI deduction works). Further contributions will save 9.6%, and after dropping into the 10% bracket, 8%. But all those remain greater than the expected 0% in retirement. :)

blwegrzyn, apologies for the buzzwords and acronyms if you aren't familiar with those. Just ask if you need some translation.
RyeBourbon
Posts: 1528
Joined: Tue Sep 01, 2020 12:20 pm
Location: Delaware/Philly

Re: Roth IRA what to invest in and how

Post by RyeBourbon »

blwegrzyn wrote: Mon Jul 01, 2024 10:17 pm
retired@50 wrote: Mon Jul 01, 2024 5:28 pm
blwegrzyn wrote: Mon Jul 01, 2024 10:04 am Image
retired@50 wrote: Mon Jul 01, 2024 8:35 am
blwegrzyn wrote: Sun Jun 30, 2024 10:12 pm I am trying to help a person to start an ROTH IRA with not a great income. (40K)
I basically helped them to open and ROTH IRA at fidelity.com and now i want to get them started so that can start saving some money for the retirement. They might be able to do first contribution of 3000-3500 and then do reoccurring by-weekly contributions and investments and hopefully try to much max allowed contributions.
Person that needs help is already 50 years old and no retirement plan at all.

I read this link:
https://www.bogleheads.org/wiki/Three-fund_portfolio
I wonder if the simple start would be simply using that money and distribute it in the Three-fund_portfolio?

I am aware that there are limits what u can purchase at the beginning.
Also not sure which Three-fund_portfolio to select as it seems like that link prioritizes the Vanguard?
When i search for low cost high return and high star morning star rating mutual funds i see different results then in examples in above link:

Looking for a quick help how to get them started with no unnecessary complexity.

Also, i wonder if using something like Fidelity Go would be also a good alternative start or it is not worth it?
A Roth IRA at Fidelity is a good start.

For a simple approach, consider either the 3-fund portfolio you mention above using Fidelity funds.
FSKAX for US Stock
FTIHX for International Stock
FXNAX for US Bonds

Another possible approach would be a target date index fund, like the 2040 fund. Be careful here as the names can be deceptive.
The low-expense ratio Fidelity Freedom INDEX 2040 Fund is the one you'd want to recommend.
See link: https://fundresearch.fidelity.com/mutua ... /315793885

This one single fund will provide a mix of assets (US stock / International stock / bonds) all in a single investment "bucket". Just fill the bucket.

Regards,
So you mention both approaches either 3-fund or Year fund. Is there really any difference here when we talk such a small funds?
I want to make sure to get the person best start possible if that is even doable.
If i would go with 3-fun approach what is the best way to split it?

Also, when i look at comparison for those funds some have higher rate of return etc then others yet i found this link mentioning the best:
https://www.morningstar.com/funds/best- ... funds-2024

Not sure how reliable this is?
Should i just go with the one that has highest rate of return?

https://fundresearch.fidelity.com/fund- ... LX%2CLIKIX
The "best start possible" is a little hard to live up to.

Since using a target date fund will already have an asset allocation (and a retirement glide path) built in, I'd suggest this route for your friend. These funds are globally diversified, low cost, and will adjust to a more conservative position as retirement nears.

Shopping around for another out-performing fund mix is a waste of time in my opinion. Past performance doesn't guarantee any future result.

Regards,
retired@50 wrote: Mon Jul 01, 2024 5:28 pm
blwegrzyn wrote: Mon Jul 01, 2024 10:04 am Image
retired@50 wrote: Mon Jul 01, 2024 8:35 am
blwegrzyn wrote: Sun Jun 30, 2024 10:12 pm I am trying to help a person to start an ROTH IRA with not a great income. (40K)
I basically helped them to open and ROTH IRA at fidelity.com and now i want to get them started so that can start saving some money for the retirement. They might be able to do first contribution of 3000-3500 and then do reoccurring by-weekly contributions and investments and hopefully try to much max allowed contributions.
Person that needs help is already 50 years old and no retirement plan at all.

I read this link:
https://www.bogleheads.org/wiki/Three-fund_portfolio
I wonder if the simple start would be simply using that money and distribute it in the Three-fund_portfolio?

I am aware that there are limits what u can purchase at the beginning.
Also not sure which Three-fund_portfolio to select as it seems like that link prioritizes the Vanguard?
When i search for low cost high return and high star morning star rating mutual funds i see different results then in examples in above link:

Looking for a quick help how to get them started with no unnecessary complexity.

Also, i wonder if using something like Fidelity Go would be also a good alternative start or it is not worth it?
A Roth IRA at Fidelity is a good start.

For a simple approach, consider either the 3-fund portfolio you mention above using Fidelity funds.
FSKAX for US Stock
FTIHX for International Stock
FXNAX for US Bonds

Another possible approach would be a target date index fund, like the 2040 fund. Be careful here as the names can be deceptive.
The low-expense ratio Fidelity Freedom INDEX 2040 Fund is the one you'd want to recommend.
See link: https://fundresearch.fidelity.com/mutua ... /315793885

This one single fund will provide a mix of assets (US stock / International stock / bonds) all in a single investment "bucket". Just fill the bucket.

Regards,
So you mention both approaches either 3-fund or Year fund. Is there really any difference here when we talk such a small funds?
I want to make sure to get the person best start possible if that is even doable.
If i would go with 3-fun approach what is the best way to split it?

Also, when i look at comparison for those funds some have higher rate of return etc then others yet i found this link mentioning the best:
https://www.morningstar.com/funds/best- ... funds-2024

Not sure how reliable this is?
Should i just go with the one that has highest rate of return?

https://fundresearch.fidelity.com/fund- ... LX%2CLIKIX
The "best start possible" is a little hard to live up to.

Since using a target date fund will already have an asset allocation (and a retirement glide path) built in, I'd suggest this route for your friend. These funds are globally diversified, low cost, and will adjust to a more conservative position as retirement nears.

Shopping around for another out-performing fund mix is a waste of time in my opinion. Past performance doesn't guarantee any future result.

Regards,
So it seems to me from all the comments above, i should advice that person to open additional traditional IRA (they will have both traditional and roth) and start in traditional IRA with initial contribution, we looking at 3000-4000 and allocate that to Target Date Fund and i was thinking to select recommended earlier Fidelity Freedom® Index 2040 Fund Investor Class or some other Target Date fund.
Seems like that would work better then 3-fund strategy?
The important thing to remember is, if going Traditional instead of Roth, to actually contribute those tax savings to the IRA.

E.g. if the Roth contribution was $4000, they should contribute $4400 to Traditional, because they will be getting a 10% tax break. Assuming they are in the 10% bracket.
Retired June 2023. LMP (TIPS Ladder/SS Bridge) 25%/Risk Portfolio 75%, AA = 60/30/10
Topic Author
blwegrzyn
Posts: 30
Joined: Sun Jun 30, 2024 9:46 pm

Re: Roth IRA what to invest in and how

Post by blwegrzyn »

FiveK wrote: Mon Jul 01, 2024 11:41 pm
retired@50 wrote: Mon Jul 01, 2024 10:43 pm Keep in mind that one can still only contribute the annual number $7,000 for under 50, or $8,000 for over 50 whether it's traditional or Roth. You could put some money in each, but still aren't allowed to exceed the annual limit.
That applies to "regular" IRAs, and may or may not be more than the person can comfortably contribute. If more contributions are doable, consider opening a SEP or SIMPLE IRA.
Also, since this person appears to have an income of $40K, they might be eligible for the Saver's Credit.
Yes, the 10% tier starts at AGI <$37.5K. With the 1/2 SE tax deduction, and a presumed Self-Employed Health Insurance deduction, that AGI will be reached even before tIRA contributions reduce AGI further.

The first $2K will save 10% + 12%*(1-20%) = 19.6% (the 20% is due to how the QBI deduction works). Further contributions will save 9.6%, and after dropping into the 10% bracket, 8%. But all those remain greater than the expected 0% in retirement. :)

blwegrzyn, apologies for the buzzwords and acronyms if you aren't familiar with those. Just ask if you need some translation.
Everyone on this forum is so helpful. Thank you.

So i am on the plan to recommend Traditional IRA with Fidelity Freedom® Index 2040 Fund Investor Class and will mention Savers Credit.
(as i understand correctly this is just tax credit when doing taxes)

EDIT:
if i select any of below with target date it outcomes would be about the same?
American Funds Target Date Retirement
BlackRock LifePath Index
Fidelity Freedom Index
Pimco RealPath Blend
T. Rowe Price Retirement
T. Rowe Price Retirement Blend
EDIT:

The only thing that i wonder is the case if lets say that person could later in some tme contribute more then max , could they transfer IRA to some other plan or those are not transferable?

Or probably if the person gets in better shape probably some individual investment like CDC or some other could be helpful.
FinancialDave
Posts: 1824
Joined: Thu May 26, 2011 9:36 pm

Re: Roth IRA what to invest in and how

Post by FinancialDave »

How about a fully funded emergency fund of at least $40k. Put half of it in ibonds which don't create taxes until sold.
I love simulated data. It turns the impossible into the possible!
User avatar
FiveK
Posts: 16346
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth IRA what to invest in and how

Post by FiveK »

blwegrzyn wrote: Tue Jul 02, 2024 10:27 am So i am on the plan to recommend Traditional IRA with Fidelity Freedom® Index 2040 Fund Investor Class
Looks good.
and will mention Savers Credit.
(as i understand correctly this is just tax credit when doing taxes)
Correct. It will probably be a $200 credit based on discussion here, so just confirm that when filing next year.
EDIT:
if i select any of below with target date it outcomes would be about the same?
American Funds Target Date Retirement
BlackRock LifePath Index
Fidelity Freedom Index
Pimco RealPath Blend
T. Rowe Price Retirement
T. Rowe Price Retirement Blend
Maybe, but don't overthink this. Whatever investment anyone chooses is practically guaranteed not to be the best thing that could have been chosen. But until we find our hindsight glasses, picking something reasonable like the Freedom Index and moving on is the best we can do.
The only thing that i wonder is the case if lets say that person could later in some tme contribute more then max , could they transfer IRA to some other plan or those are not transferable?
Contribution limits are annual. The size of the account has no limit.
Or probably if the person gets in better shape probably some individual investment like CDC or some other could be helpful.
No idea what CDC is but investing in individual stocks is not recommended.
Topic Author
blwegrzyn
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Re: Roth IRA what to invest in and how

Post by blwegrzyn »

FiveK wrote: Tue Jul 02, 2024 1:32 pm
blwegrzyn wrote: Tue Jul 02, 2024 10:27 am So i am on the plan to recommend Traditional IRA with Fidelity Freedom® Index 2040 Fund Investor Class
Looks good.
and will mention Savers Credit.
(as i understand correctly this is just tax credit when doing taxes)
Correct. It will probably be a $200 credit based on discussion here, so just confirm that when filing next year.
EDIT:
if i select any of below with target date it outcomes would be about the same?
American Funds Target Date Retirement
BlackRock LifePath Index
Fidelity Freedom Index
Pimco RealPath Blend
T. Rowe Price Retirement
T. Rowe Price Retirement Blend
Maybe, but don't overthink this. Whatever investment anyone chooses is practically guaranteed not to be the best thing that could have been chosen. But until we find our hindsight glasses, picking something reasonable like the Freedom Index and moving on is the best we can do.
The only thing that i wonder is the case if lets say that person could later in some tme contribute more then max , could they transfer IRA to some other plan or those are not transferable?
Contribution limits are annual. The size of the account has no limit.
Or probably if the person gets in better shape probably some individual investment like CDC or some other could be helpful.
No idea what CDC is but investing in individual stocks is not recommended.
sorry meant CD savings.
I also meant contribution limit to IRA not to account. (7k or 8K over 50)
Sorry if i dont describe things property.
I have learned so much here in few days. No advisor could teach me so fast.
RyeBourbon
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Re: Roth IRA what to invest in and how

Post by RyeBourbon »

blwegrzyn wrote: Tue Jul 02, 2024 3:47 pm I have learned so much here in few days. No advisor could teach me so fast.
You've got that right!
Retired June 2023. LMP (TIPS Ladder/SS Bridge) 25%/Risk Portfolio 75%, AA = 60/30/10
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FiveK
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Re: Roth IRA what to invest in and how

Post by FiveK »

blwegrzyn wrote: Tue Jul 02, 2024 3:47 pm
FiveK wrote: Tue Jul 02, 2024 1:32 pm
The only thing that i wonder is the case if lets say that person could later in some tme contribute more then max , could they transfer IRA to some other plan or those are not transferable?
Contribution limits are annual. The size of the account has no limit.
Or probably if the person gets in better shape probably some individual investment like CDC or some other could be helpful.
No idea what CDC is but investing in individual stocks is not recommended.
sorry meant CD savings.
I also meant contribution limit to IRA not to account. (7k or 8K over 50)
Sorry if i dont describe things property.
I have learned so much here in few days. No advisor could teach me so fast.
No apologies needed: everyone who posts here has probably made multiple typos over time, and nobody knew all this until they learned it.

Still not sure what you mean by "contribute more than max". If you look at the article suggested by retired@50,
take each step at a time and when you have reached the max for that step (or if it is not applicable) then move to the next step. Does that answer the question or is there something else?

For the first step in that prioritization, there is no "correct" size for an emergency fund. Common suggestions range from $1000 to some number of months' worth of expenses, and should depend on a person's risk tolerance and employment stability.
Topic Author
blwegrzyn
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Re: Roth IRA what to invest in and how

Post by blwegrzyn »

FiveK wrote: Tue Jul 02, 2024 4:15 pm
blwegrzyn wrote: Tue Jul 02, 2024 3:47 pm
FiveK wrote: Tue Jul 02, 2024 1:32 pm
The only thing that i wonder is the case if lets say that person could later in some tme contribute more then max , could they transfer IRA to some other plan or those are not transferable?
Contribution limits are annual. The size of the account has no limit.
Or probably if the person gets in better shape probably some individual investment like CDC or some other could be helpful.
No idea what CDC is but investing in individual stocks is not recommended.
sorry meant CD savings.
I also meant contribution limit to IRA not to account. (7k or 8K over 50)
Sorry if i dont describe things property.
I have learned so much here in few days. No advisor could teach me so fast.
No apologies needed: everyone who posts here has probably made multiple typos over time, and nobody knew all this until they learned it.

Still not sure what you mean by "contribute more than max". If you look at the article suggested by retired@50,
take each step at a time and when you have reached the max for that step (or if it is not applicable) then move to the next step. Does that answer the question or is there something else?

For the first step in that prioritization, there is no "correct" size for an emergency fund. Common suggestions range from $1000 to some number of months' worth of expenses, and should depend on a person's risk tolerance and employment stability.
As far as i know they might have like 4-5$ for emergency which is not ideal, i will try to let them understand this is important.
Those are my dear friends and trying to help them a little so they dont end up totally lost when retirement time comes.

In regards to max i mentioned, i meant max you can contribute to IRA which is 7000 or 8000 if over 50.
What if that person somehow gets in better shape, and can contribute more then those limits.
Can they then open different account type then with less limits and transfer from iRA or IRA funds are not transferable?
Or usually its better to open some individual investment account and start investing there.

Was also thinking if on top of the IRA they would open, would it be work to open another individual account and just buy SP500 for 1000$ and see how it goes and maybe add few dollars from time to time?
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FiveK
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Re: Roth IRA what to invest in and how

Post by FiveK »

blwegrzyn wrote: Tue Jul 02, 2024 4:53 pm
FiveK wrote: Tue Jul 02, 2024 4:15 pm If you look at the article suggested by retired@50,
take each step at a time and when you have reached the max for that step (or if it is not applicable) then move to the next step. Does that answer the question or is there something else?

For the first step in that prioritization, there is no "correct" size for an emergency fund. Common suggestions range from $1000 to some number of months' worth of expenses, and should depend on a person's risk tolerance and employment stability.
As far as i know they might have like 4-5$ for emergency which is not ideal, i will try to let them understand this is important.
Those are my dear friends and trying to help them a little so they dont end up totally lost when retirement time comes.
$4K is actually more than many have. Maybe on the low side but not horrible, so "slowly increasing the e-fund while primarily directing excess cash flow to tax-advantaged investments" is reasonable.
In regards to max i mentioned, i meant max you can contribute to IRA which is 7000 or 8000 if over 50.
What if that person somehow gets in better shape, and can contribute more then those limits.
Those limits are annual, not cumulative. Because the AGI for the MFJ couple is high enough, they can each contribute $7K or $8K per year to their own Individual Retirement Account. No need to transfer the money from those IRAs. Just contribute another $7K or $8K next year, and the year after that, etc.

If there is more than $16K available in a given year, then they should investigate a SEP or SIMPLE IRA account that self-employed people can use (similar to how W-2 employees use a 401k or 403b) to contribute more.
Was also thinking if on top of the IRA they would open, would it be work to open another individual account and just buy SP500 for 1000$ and see how it goes and maybe add few dollars from time to time?
See the Prioritizing investments article. One step at a time....
nyejos11
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Re: Roth IRA what to invest in and how

Post by nyejos11 »

Contributions can be withdrawn from a Roth IRA at any time without tax implications or withdrawal penalties. Traditional Ira and 401 k will cost you a penalty.
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Johnnie
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Re: Roth IRA what to invest in and how

Post by Johnnie »

blwegrzyn wrote: Mon Jul 01, 2024 10:09 am
Johnnie wrote: Mon Jul 01, 2024 9:49 am This person has two separate problems: No emergency fund, and no growth-oriented investments.
On the latter, he could do a whole lot worse than just sticking the whole growth allocation in the VG Total Market Fund, period. Simple and "clean."
Are you referring to this one: VTSMX ? You mean invest everything in it?
Yes and no.

The OP states that at age 50 this person has almost no emergency fund, which I read as he's practically penniless. That is the most dire and immediate threat to his future - and his present. It's an emergency; he's just one minor setback from landing on the street. A decent start on filling that hole is his highest priority.

When there's a little breathing room he can start investing in growth assets, meaning a stock mutual fund. And given the modest amounts in play, that should be the Total Market Fund, for reasons Bogleheads well understand.

Until the wolves have been chased well away from the door by a respectable pile of emergency fund cash, and the TMF balance is starting to look respectable, the emergency fund can stand-in as his "fixed-income" portfolio.

~~~~~~

ETA, as I mentioned, the OP should make sure this person understands the tradeoffs on when to claim Social Security, and the value of waiting. With so little time before retirement, distributions from his investment portfolio might help him wait an extra year or two before taking SS.
"I know nothing."
Topic Author
blwegrzyn
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Joined: Sun Jun 30, 2024 9:46 pm

Re: Roth IRA what to invest in and how

Post by blwegrzyn »

So, because i already helped to open roth ira and deposited test 100$ should i try to convert it to traditional ira or just open traditional and keep roth and then add some little amount within 5 years to avoid penalty? Not sure if its even worth speaking to fidelity rep as i am afraid they will try to get the person into some fidelity go or some other account.
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BL
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Re: Roth IRA what to invest in and how

Post by BL »

blwegrzyn wrote: Tue Jul 02, 2024 10:27 am

EDIT:
if i select any of below with target date it outcomes would be about the same?
American Funds Target Date Retirement
BlackRock LifePath Index
Fidelity Freedom Index
Pimco RealPath Blend
T. Rowe Price Retirement
T. Rowe Price Retirement Blend
One way to compare is to find the expense ratio (ER) for each. For instance, that might catch the very different cost of the two Fidelity Freedom Funds (one is Index, the other (easier to find) one is not and costs more.) You want to be sure to use the Index fund. I would guess most of the others cost more (higher ER).
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