23 yr old need investment help.

[linwa1]

My son has saved $25,000 and would like to start investing. A live at home, college grad, taking home $1500.00 he saves about 90% of his earnings. Of course his expenses will not always be so low, but may stay that way for the next two years. Would a $10,000 VTSAX and a Roth Ira ($5000 for 2013 and $5000 for 2014) and $5000 kept in savings be a good way to start?

[matchewed]

Sure. I'd encourage him to read jlcollinsnh.com and go to the stock series. It's a nice easy primer.

[the fixer]

That sounds like a great plan to me too. Make sure he understands risk vs. reward, that the prices may swing a bunch but it doesn't matter because he won't need that money for a long time. The volatility is the price being paid for long-term performance. Too many investors don't understand this and then panic-sell when the market drops.

[griffin]

I'm in a similar situation myself - 22, living at (my parent's) home, ~4k a month pre-taxes/deductions etc and ~20k in cash (though I struggle to hit even an 80% savings rate, nice work!). I just maxed out my Roth IRAs with VTSAX for 2013/2014 ($5,500 each, not $5,000!), and plopped the rest into a VTSMX fund (working on building it up to VTSAX). As mentioned above, the stock series on johncollins are excellent reads, and I highly recommend actually understanding why you're investing instead of just blindly following someone's advice - he should read them! It is really nice to think of investing as something fun instead of something scary!
Also I think the mad fientiest has an article concerning Roth IRA vs Traditional IRA and the traditional IRA seems to be the better choice, even when you're in fairly low tax brackets...I have to run but I'll try to link the article in a bit!
Cheers,
Griffin

[Frankies Girl]

http://jlcollinsnh.com/2011/06/08/how-i-failed-my-daughter-and-a-simple-path-to-wealth/
For your son's age, this is one of the most pertinent posts, but do have him read his stock series so he understands how it all works.

[ajaxlupis]

I would definitely set up the Roth IRA and get the contributions for both 2013 (do it before April) and 2014.  VTSMX is a good option but I would also recommend an international fund like VGTSX (I invested in both when I started out).  As you probably know, the minimum investment for each is $3000 so you can open both now (let $3000 for VTSXM and $2000 for VGTSX count towards your 2013 contribution and then let $1000 of VGTSX go towards 2014).  I would suggest against investing the lump sum all at once, just to ensure you don't buy the day before the market tumbles (like happened today).  Get your initial $6000 in now but then spread out the 2014 contribution over a couple months.

Depending on your son's situation, you may also look at 401(k) or 403(b) if he works at a place that has those (you probably already thought of that).  If your investing in a Roth IRA then it seems you're/he's in it for the long haul so there's no real reason to not max that out.  And since he has such a high savings rate, there's no real need to keep a bunch of cash (other than just his day to day expenses).  He can make that up in a couple months if he needs to, and keeping $5000 in cash instead of an equity fund will cost about $30 per month (assuming 7% return).

[linwa1]

Thank you all for the input. My son and I are new to the investing arena and hope to make smart choices and avoid too many lions!

[griffin]

Found the Roth vs Traditional IRA link I mentioned above: http://www.madfientist.com/traditional-ira-vs-roth-ira/
So for almost all situations the traditional IRA is superior (assuming laws concerning these accounts do not change!). That said, I went with a Roth (I like the ability to withdraw my initial investment as a sort of safety net while I build up my 'stache). Happy investing!

[beltim]

With that low an income, the retirement savings contribution credit is an awesome 50% bonus (up to your total taxes): http://www.irs.gov/uac/Get-Credit-for-Your-Retirement-Savings-Contributions

The strategy for traditional vs. Roth IRA should be: use traditional until total tax liability is 0 (because the credit isn't refundable), then Roth IRA, because that will be tax free forever.