Author Topic: Best resources on why a Roth IRA is good for a new earner  (Read 684 times)

lhamo

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Best resources on why a Roth IRA is good for a new earner
« on: July 01, 2019, 09:23:52 AM »
DS is doing a well-paid tech internship this summer.  We will be covering his rent for the next year out of his college fund, so he wants to invest a portion of the money -- he is a CS major and either will go to grad school fully funded or get a high-paying tech job when he graduates, so he doesn't need access to the money in the short term.  He also won't have much of a tax burden because the internship is only for 12 weeks/$20kish, so it seems the Roth is the better choice.  Thought I'd ask here what people's favorite sites/blog posts are to explain the benefits of a Roth to a younger person just starting out in their career and financial life.

MDM

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Re: Best resources on why a Roth IRA is good for a new earner
« Reply #1 on: July 01, 2019, 10:10:11 AM »
Assuming he will still be your dependent (so the saver's credit won't apply), you could remind him of the commutative property of multiplication and how it applies to his situation: better to pay a lower tax rate now than a higher one later.


lhamo

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Re: Best resources on why a Roth IRA is good for a new earner
« Reply #2 on: July 01, 2019, 01:20:27 PM »
He's 18 so there is no benefit to us including him on our taxes -- I was going to walk him through filing his own return.

MDM

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Re: Best resources on why a Roth IRA is good for a new earner
« Reply #3 on: July 01, 2019, 01:41:02 PM »
He's 18 so there is no benefit to us including him on our taxes -- I was going to walk him through filing his own return.
Yes, if you owe no tax then the $500 additional CTC won't benefit you.

If he is not your dependent, however, Roth is not necessarily best at a $20K income, because he's very close to the $19,250 cutoff for the 50% saver's credit tier.

seattlecyclone

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Re: Best resources on why a Roth IRA is good for a new earner
« Reply #4 on: July 01, 2019, 01:51:40 PM »
He's 18 so there is no benefit to us including him on our taxes -- I was going to walk him through filing his own return.

You're not really allowed to choose whether he's a dependent or not. If you provide the majority of his support (among the other requirements), he's still a dependent.

Nobody's forcing you to claim the benefits of dependency on your tax return, but on his side the question isn't whether or not you did claim him, but whether you could.

MDM

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Re: Best resources on why a Roth IRA is good for a new earner
« Reply #5 on: July 02, 2019, 08:26:07 PM »
If you aren't familiar with the intricacies of "who could be a dependent?" see section C (particularly pp. C-7 and C-8) of https://www.irs.gov/pub/irs-pdf/p4012.pdf.

See also https://www.thetaxadviser.com/issues/2010/aug/nichols-aug-2010.html for a decent review.

Once the facts are established in hindsight, your son either is or is not eligible to be your dependent.  But you as a family may, in all legality, arrange those facts during this year to reach the conclusion you desire.  E.g., "who pays" the college expenses.


seattlecyclone

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Re: Best resources on why a Roth IRA is good for a new earner
« Reply #6 on: July 03, 2019, 02:36:58 PM »
Exactly. The time to decide whether or not it's advantageous for him to be a dependent is now, while there's still plenty of time left in the year to arrange things either way.

After further reading on the topic, what I said before about dependents isn't fully correct. For the purpose of the standard deduction, if you can be claimed as a dependent your deduction is the same whether your parents actually claim you as a dependent or not. However the parent's choice to claim a qualifying child or not does make a difference for certain tax credits (such as education credits and the saver's credit). I think your son would be disqualified from the saver's credit anyway until he is no longer a full-time student, but the education credit piece could be quite relevant to your decision here.