Author Topic: Beginner needs help with IRA  (Read 2226 times)

Better Late Than Never

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Beginner needs help with IRA
« on: March 13, 2015, 07:14:17 PM »
My son is turning 20 next month, works at a local grocery store 30-35 hours per week, and earned $15,000 last year. I helped him fill out his 2014 taxes, but he has not filed them yet. He is getting $1,000 refund, and since I know you can contribute to an IRA for 2014 until April, we redid his taxes to see the difference with an IRA contribution. He is eligible for the saver’s credit, so if he contributes $1,000 to a Roth IRA his refund will be $1,500, and if he contributes to a traditional IRA his refund will be $1,568.

1) Even though he would get a slightly bigger refund with the traditional IRA, should he do the Roth since he is in a low tax bracket?

2) If he ever decides to go back to school and needs to access the account for tuition money, is it better to have a traditional or Roth?

3) Where is the best place to start an IRA with only $1,000? Are there fees and expenses that we need to watch out for?

4) How do you actually start the IRA – an online transfer from his savings account, or do you have to send a check?

5) After the initial account is set up, can he make contributions on a weekly/monthly basis into the same account?

6) Is there anything he needs to do to make sure his 2014 taxes are filed correctly? TurboTax only asks if you made an IRA contribution for 2014 before April 2015. Will the financial institution send documentation to the IRS after he opens the account?

Thank you for your help!

MDM

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Re: Beginner needs help with IRA
« Reply #1 on: March 13, 2015, 09:02:10 PM »
1) Even though he would get a slightly bigger refund with the traditional IRA, should he do the Roth since he is in a low tax bracket?

2) If he ever decides to go back to school and needs to access the account for tuition money, is it better to have a traditional or Roth?

3) Where is the best place to start an IRA with only $1,000? Are there fees and expenses that we need to watch out for?

4) How do you actually start the IRA – an online transfer from his savings account, or do you have to send a check?

5) After the initial account is set up, can he make contributions on a weekly/monthly basis into the same account?

6) Is there anything he needs to do to make sure his 2014 taxes are filed correctly? TurboTax only asks if you made an IRA contribution for 2014 before April 2015. Will the financial institution send documentation to the IRS after he opens the account?
1) It's arguable but I'd say yes.
2) Roth.  No question.  No penalty on withdrawal of contributions.
3) https://investor.vanguard.com/ira/vanguard?WT.srch=1 is one good place to start.  https://personal.vanguard.com/us/funds/snapshot?FundId=1691&FundIntExt=INT is one fund that would fit his situation.
4) Follow the first link in answer #3.  You can do it either way.  We do online transfer from checking.
5) I believe so - ask Vanguard if you go that way.
6) Don't know exactly what communication occurs, but if he opens an IRA and ensures the contributions are for 2014 (Vanguard will ask), he is all set.

GGNoob

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Re: Beginner needs help with IRA
« Reply #2 on: March 13, 2015, 10:51:36 PM »
1) Do Roth for sure. That extra $68 refund is not worth paying taxes when he withdraws the money in retirement.
2) Roth
3) Like MDM said, Vanguard Target Retirement 2060 fund.
4) Can easily link your bank account and do the transfer. I think when I set up my Vanguard account, they were able to withdraw the initial contribution before my bank account was actually confirmed. So they invested the money the day I set my account up (I set it up during business hours) and the money came out of my bank account the next business day.
5) Yes, you can set up recurring contributions for as little as $1 per contribution.
6) You do not need to contribute to the IRA before you file your taxes. Just put down the amount he will contribute by April 15th for 2014 and then file the return. That way if he needs to get the refund back before he can afford to contribute, he can do that. There will be no tax forms from Vanguard when contributing to a Roth (not sure about a traditional as I don't have one), only on withdrawals.

Better Late Than Never

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Re: Beginner needs help with IRA
« Reply #3 on: March 14, 2015, 02:16:53 PM »
Thank you MDM and Logan T for your help. He has enough in his savings right now to open an account, so we'll probably open it right away and then file his taxes. I might even have him put in $1,500 since he'll be getting $1,500 back. Next step will be to sit down with him to help him set a budget so that he can contribute more in 2015 and also build an emergency fund. Thanks again for the advice!

LordSquidworth

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Re: Beginner needs help with IRA
« Reply #4 on: March 14, 2015, 04:17:04 PM »
My son is turning 20 next month, works at a local grocery store 30-35 hours per week, and earned $15,000 last year. I helped him fill out his 2014 taxes, but he has not filed them yet. He is getting $1,000 refund, and since I know you can contribute to an IRA for 2014 until April, we redid his taxes to see the difference with an IRA contribution. He is eligible for the saver’s credit, so if he contributes $1,000 to a Roth IRA his refund will be $1,500, and if he contributes to a traditional IRA his refund will be $1,568.

1) Even though he would get a slightly bigger refund with the traditional IRA, should he do the Roth since he is in a low tax bracket?
I'd go with a Roth.
2) If he ever decides to go back to school and needs to access the account for tuition money, is it better to have a traditional or Roth?
Access later; Roth.
3) Where is the best place to start an IRA with only $1,000? Are there fees and expenses that we need to watch out for?
Vanguard probably. Though I'm not sure what the minimums to invest are these days.
4) How do you actually start the IRA – an online transfer from his savings account, or do you have to send a check?
Go to the website and open the account. Then either do a bank transfer or send a check.
5) After the initial account is set up, can he make contributions on a weekly/monthly basis into the same account?
If he sets that up, yes.
6) Is there anything he needs to do to make sure his 2014 taxes are filed correctly? TurboTax only asks if you made an IRA contribution for 2014 before April 2015. Will the financial institution send documentation to the IRS after he opens the account?

Thank you for your help!