Author Topic: Noob Question on Traditional IRA and Roth IRA  (Read 2247 times)

FreedomInc

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Noob Question on Traditional IRA and Roth IRA
« on: March 10, 2015, 02:47:57 AM »
Hello fellow mustachians of the world,

I'm a college student and want to open an IRA account and put $100 in it, just out of principle. I don't have any income right now, so it would be best to put this in the Roth IRA, correct? Since the money in my savings has already passed the tax "screen", and then I can take it out tax free.

Putting it into a traditional IRA wouldn't make sense, because then I would pay taxes on it when I take it out.

Thanks! Big fan of the community here.



jasminegeekface

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Re: Noob Question on Traditional IRA and Roth IRA
« Reply #1 on: March 10, 2015, 06:04:28 AM »
You are correct. Since you have no taxable income right now, it's better to just put it in a Roth.

kpd905

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Re: Noob Question on Traditional IRA and Roth IRA
« Reply #2 on: March 10, 2015, 06:17:19 AM »
I don't think you'll be able to invest $100 at most good brokerages.  Vanguard would let you invest $1000 in a target date fund.

bdoubleu

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Re: Noob Question on Traditional IRA and Roth IRA
« Reply #3 on: March 10, 2015, 06:41:33 AM »
Hello fellow mustachians of the world,

I'm a college student and want to open an IRA account and put $100 in it, just out of principle. I don't have any income right now, so it would be best to put this in the Roth IRA, correct? Since the money in my savings has already passed the tax "screen", and then I can take it out tax free.

Putting it into a traditional IRA wouldn't make sense, because then I would pay taxes on it when I take it out.

Thanks! Big fan of the community here.

Also, you need to have earned income at least equal to what you want to put in the IRA, for the tax year you select (ie, could still fund for 2014, so would need at least $100 earned income in 2014.  If funding for 2015, you will need to have at least $100 earned income by the end of the year).

77rider

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Re: Noob Question on Traditional IRA and Roth IRA
« Reply #4 on: March 10, 2015, 07:34:54 AM »
Betterment would let you start with $100. AFAIK there is actually no minimum. Real upside of that service, IMO.

rocketman48097

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Re: Noob Question on Traditional IRA and Roth IRA
« Reply #5 on: March 10, 2015, 08:59:35 AM »
If you are at a 0% tax bracket, I would advise investing this in a taxable account.  You are likely to retire early, and the Roth has restrictions until age 59.5.  As long as you stay in the 15% tax bracket, your dividends and capital gains will be taxed at 0%, without the draconian restrictions of a Roth IRA.

When you start making income, only contribute to the tIRA AFTER you have maxed out your 401k (by max, I don't mean the match, I mean the IRS maximum of 18k per year). 

Hope this helps, I opened up my first tIRA at age 18, before I even started college, for the same reason you did.  I only had $100, but wanted to get the ball rolling somehow. 

Gone Fishing

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Re: Noob Question on Traditional IRA and Roth IRA
« Reply #6 on: March 10, 2015, 09:34:34 AM »
If you are at a 0% tax bracket, I would advise investing this in a taxable account.  You are likely to retire early, and the Roth has restrictions until age 59.5.  As long as you stay in the 15% tax bracket, your dividends and capital gains will be taxed at 0%, without the draconian restrictions of a Roth IRA.

You can always pull out your contributions penalty free, just your earnings are restricted.  Here is little reading:

http://www.forbes.com/sites/ashleaebeling/2014/05/27/the-roth-ira-mistake/

But, before you hurt you yourself too much trying to decide on what type of account you need, I would suggest getting a job, or starting a little business to earn income while you are in college.  Most college students, unless they are in a very rigorous program, can easily work 10-20 hours a week which can be used to offset college loans or if school is already paid for, used to get your investment accounts rolling.  Even if you only make a few thousand a year it can give you quite a leg up vs those who spend all their free time watching Comedy Central. 

catccc

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Re: Noob Question on Traditional IRA and Roth IRA
« Reply #7 on: March 10, 2015, 09:50:39 AM »
If you are at a 0% tax bracket, I would advise investing this in a taxable account.  You are likely to retire early, and the Roth has restrictions until age 59.5.  As long as you stay in the 15% tax bracket, your dividends and capital gains will be taxed at 0%, without the draconian restrictions of a Roth IRA.

Since most are limited in what you can put in a Roth, and you are paying nothing in taxes now, I say stick with the Roth.  (First get some earned income so you can contribute!)  The principle can always come out penalty/tax free, after 5 years earnings can come out for certain purposes tax free (purchase of first home).  If you invest in a taxable account now and take it out later when you are in a higher tax bracket, it might not work out to have been the best move.

I originally started my Roth as a way to save for a home.  I really liked that exception they were making.  Many years of contributions later, I am still not a homeowner, I never raided my Roth for this.  And I likely never will.  My stash has grown, and I'm really glad I got this started when I did.