Author Topic: starter IRA for my son?  (Read 1321 times)

albireo13

  • Bristles
  • ***
  • Posts: 483
  • Location: New England
starter IRA for my son?
« on: January 26, 2018, 04:42:02 AM »
  My 26 yo son is thinking of starting an IRA for himself.  I've been encouraging saving.  : )
He doesn't have a big income right now and it would be good to get it started.  I was thinking of a Vanguard Index fund.
  Any good suggestions?

Also  ....  Roth or traditional IRA?
I was thinking a Roth may be good since he is in a low tax bracket right now and long term growth in the Roth would be untaxed.

Thx,
Rob

albireo13

  • Bristles
  • ***
  • Posts: 483
  • Location: New England
Re: starter IRA for my son?
« Reply #1 on: January 26, 2018, 06:02:08 AM »
  I am now thinking of a good idea would be a Roth IRA in a Vanguard Target Retirement fund.

I think it is safe, and a good intro into investing for my son.


swinginbeef

  • 5 O'Clock Shadow
  • *
  • Posts: 71
Re: starter IRA for my son?
« Reply #2 on: January 26, 2018, 06:32:26 AM »
I'm opening Roth IRAs for my oldest two this tax season because 2017 was their first year with income. I'm opening the accounts with Vanguard for an amount matching their total earnings (both made well under $5500) and putting it in VTSMX. Once the account reaches the Admiral fund minimums, I'll roll them over to VTSAX.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10764
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: starter IRA for my son?
« Reply #3 on: January 26, 2018, 07:11:04 AM »
  My 26 yo son is thinking of starting an IRA for himself.  I've been encouraging saving.  : )
He doesn't have a big income right now and it would be good to get it started.  I was thinking of a Vanguard Index fund.
  Any good suggestions?

Also  ....  Roth or traditional IRA?
I was thinking a Roth may be good since he is in a low tax bracket right now and long term growth in the Roth would be untaxed.

Thx,
Rob
Rob - it's a bit hard to give advice here because asset allocation is a personal decision and you've left out some important information for the Roth vs tIRA.
Yes, the target retirement funds at Vanguard are good choices if you want a mixture of bonds and stocks, and automatic rebalancing as he gets older.  Most here would go with an all equities market index, like what swinginbeef suggested (VTSAX/VTSMX)

As for Roth vs tIRA - what is his income now?  single/MFJ?  Would you expect him to spend more or less than his current income in retirement? For most a tIRA wins out, but not always.

albireo13

  • Bristles
  • ***
  • Posts: 483
  • Location: New England
Re: starter IRA for my son?
« Reply #4 on: January 27, 2018, 05:22:23 AM »
Right now his income is $40K/yr.  He hasn't saved anything yet.

GizmoTX

  • Handlebar Stache
  • *****
  • Posts: 1392
Re: starter IRA for my son?
« Reply #5 on: January 27, 2018, 05:35:14 PM »
Is he debt free? This is the first goal.
Does his employment offer a 401K with a match? If so, he should sign up to deduct enough to get the match.
In any event, he should fully fund a Roth IRA in a low cost index fund (Vanguard or Schwab Total Stock Market).
If he then has any extra to save, he should build an emergency fund of at least 6 months of his expenses.
Then invest in a low cost index fund in a taxable account.

The key is to have his savings deducted before he gets his paycheck, or it's likely to not happen. If he gets a raise, throw the raise at his savings.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10764
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: starter IRA for my son?
« Reply #6 on: January 28, 2018, 08:36:17 AM »
Right now his income is $40K/yr.  He hasn't saved anything yet.

Your son needs to buy into this or its never going to work.  Hopefully that's already in the cards, but it was unclear form your post whether this is your son's idea or your own.

For starters, it would be helpful if you and he read the stock seires by JLCollins
http://jlcollinsnh.com/stock-series/

AS for what to invest in and in what order, this is basically boilerplate around here. 
Your son is starting out around step 0/1.  No idea if he has debt or not.  Anyone who can get to step #5 at his young age will be fast-track for financial security

WHAT           
0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.           
3. Max HSA             
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level           
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)           
6. Fund a mega backdoor Roth if applicable.         
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.           
8. Invest in a taxable account with any extra.           
           
WHY           
0. Give yourself at least enough buffer to avoid worries about bouncing checks           
1. Company match rates are likely the highest percent return you can get on your money           
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs for that purpose.
    At worst, the HSA behaves much the same as a tIRA after age 65.
4. Rule of thumb: traditional if current federal marginal rate is 25%; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise.
   See Credits can make Traditional better than Roth for lower incomes and other posts in that thread about some exceptions to the rule.
   See Traditional versus Roth - Bogleheads for even more details and exceptions.  State tax (or lack thereof) should also be considered.
   The 'Calculations' tab in the Case Study Spreadsheet can show marginal rates for savings or withdrawals*.
5. See #4 for choice of traditional or Roth for 401k.  In a 401k there are no income-based limits for deductions or contributions.     
6. Applicability depends on the rules for the specific 401k           
7. Again, take the risk-free return if high enough.  Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds"
   (e.g., target retirement date) that provides a blend of stock and bond returns.  If you wish to consider separate bond funds, compare the yield on a fund
   with a duration similar to the time remaining on the loan, and put your money toward the one with the higher interest/yield.
8. Because any earnings, even if taxed, will help your FI journey.