IRA Question

[txrandom]

I'm only 19, but I'm looking to lock away some money in a retirement fund. Right now I have a large sum of money sitting in a 5.65% CD. After that CD expires, I'm going to add some to a retirement account and keep the rest in a CD or high-yield savings account.

I was looking at IRA information at Vanguard specifically the traditional IRA. It says you can't contribute more than you earned. I'm a student, who just quit his job, so I make next to nothing in income throughout the year. I almost make more income from interest than working. You must start your IRA with $3,000, but I didn't make $3000 in income this year. Does this mean I can't even open up an IRA?

Now let's assume I have an IRA, I'm only allowed to contribute up to my total income each year or $5000, and my main income is interest income from the CD. Can I add interest income to my IRA and not pay income taxes (or is it capital gain?) on it? So if I add all income for a year (assuming it's less than $5000), do I pay no income taxes at all?

If it matters I'm listed as a dependent on my parents tax return, and I let them do all the taxes for me. They just extract the proper amount after they are done figuring it out. Since an IRA is an agreement between me, IRS, and the account manager, will this affect my parents taxes?

Do you think there is a better way to save my money for retirement?

 

[minendo]

Don't do a traditional IRA. Invest in a Roth.

 

[maddogchen]

if you are a student and 19, i suggest a ROTH IRA. I never had to worry about income tax as a student since what I paid for in education I was able to deduct from my income taxes. And I made so little, barely enough to cover education that it came out zero.

 

[txrandom]

I was also looking at the ROTH IRA, but I didn't realize I hardly pay any income taxes now. It would be better to pay a little tax now and get it all back in 50 years tax free rather than getting it taxed in 50 years.

 

[Mxylplyx]

Originally posted by: txrandom
I was also looking at the ROTH IRA, but I didn't realize I hardly pay any income taxes now. It would be better to pay a little tax now and get it all back in 50 years tax free rather than getting it taxed in 50 years.

You just answered your own question. You want a Roth IRA, as distributions are tax free come retirement.

 

[Dirigible]

Originally posted by: minendo
Don't do a traditional IRA. Invest in a Roth.

Yup, at your tax level it makes sense to go Roth instead of traditional.

Some places may let you open an IRA with smaller automatic monthly payments instead of a $3k lump sum initial investment. See if that's available and if it'll work with your income level. Some places may allow a smaller initial investment as well.

Alternatively, get a job and earn some more money ya bum! (You should be able to make $3k pretty easily if you want at some slacker job.)

 

[dud]

How much is "a large sum of money"? You can open/have both a traditional AND a Roth IRA.

The Roth will hold after-tax monies (tax has already been paid on the income) and the interest (in most cases) is tax FREE.

The traditional IRA will hold pre-tax dollars that will be taxed when withdrawn. The traditional IRA is typically funded via a payroll deduction, which helps lower you current taxable income (and the taxes you pay) in the year you deposit the monies into it.

If the large sum of money has already been taxed then by all means open a Roth. Get yourself a copy of the latest Money magazine and use their research to pick a fund that is best for you. I recommend the T-Rowe Price retirement funds.

 

[maddogchen]

if you don't need the money now, i would suggest opening up a ROTH IRA with vanguard and putting it in something like VTSMX, a total stock market index fund and leaving it there.

But if you don't have an emergency fund of 3-6 months, I suggest you fund that first.

Also you putting it in a ROTH IRA should not affect your parent's taxes.

 

[Beattie]

To open an IRA (and like everyone here said, you want a Roth) most institutions want some minimum. Fidelity is like $2500, some others are less. Find one that meets your needs. I then suggest putting money in, selecting some good mutual funds and then just adding more every year up to the max.

Also, if you have more short term needs like money for college you might want to put that money in a savings account so that it's available for paying those bills.

 

[DaveSimmons]

Roth IRA is a good choice, and I now recommend the Vanguard Target (yar) funds like Target 2050 over VFINX and VTSMX since it gives you both of those plus foreign index funds. It is a fund made up of shares of a bunch of great Vanguard index funds.

You would want the Target 2050 fund: vanguard

If you're not going to have any income yet you might not be able to do the IRA this year. What you can do instead is put as much as you can into high interest savings (like at INGDirect.com) then when you have a job later you can live partly off the savings so you can afford to put more of your salary into the Roth IRA.

This is a great way to get a head start on an early retirement.

 

[Special K]

Originally posted by: dud
How much is "a large sum of money"? You can open/have both a traditional AND a Roth IRA.

The Roth will hold after-tax monies (tax has already been paid on the income) and the interest (in most cases) is tax FREE.

The traditional IRA will hold pre-tax dollars that will be taxed when withdrawn. The traditional IRA is typically funded via a payroll deduction, which helps lower you current taxable income (and the taxes you pay) in the year you deposit the monies into it.

If the large sum of money has already been taxed then by all means open a Roth. Get yourself a copy of the latest Money magazine and use their research to pick a fund that is best for you. I recommend the T-Rowe Price retirement funds.

I would recommend picking index funds like VTSMX or even better, one of the target retirement funds, rather than trying to performance chase after Money magazine's funds of the year. Many of their top-ranked funds end up performing quite poorly in the following years.

 

[overst33r]

check out www.diehards.org. search or make and account. there are some very helpful people over there with good advice.

FWIW, I suggest the VFIFX 2050 Target Retirement fund. Low expense ratio and well diversified. Just set it and forget it.

 

[txrandom]

I was trying to remember that forum mariok, thanks!

I have about a 30k in a CD that expires in October. My grandparents gave me a 20K gift. I'm pretty sure I don't have to pay any taxes on it, but they may have to pay taxes. I thought I read somewhere that any gifts lower than or equal to 20k were not taxed, but the tax wouldn't be my liability anyways. For about the past five years, it has been building interest, and I have added a majority of my income.

In five weeks, I'll be in Europe for five weeks, so getting a job for the summer is going to be difficult. I actually just quit my job yesterday. I guess college is a good time to add to my retirement account. My income is hardly taxed, and most of my college expenses are paid by my parents or scholarships. This allows me to put most of my income in savings. I'm guessing my parents get some tax deductions by paying for my education? Sounds like a win-win for me and my parents. Well besides the fact that they are paying for my college...but I'll repay them one day.

Thanks for all the links. I'm going to check out the Vanguard and Fidelity funds and get some knowledge from my parents as well.

 

[boomerang]

Originally posted by: Mxylplyx

Originally posted by: txrandom
I was also looking at the ROTH IRA, but I didn't realize I hardly pay any income taxes now. It would be better to pay a little tax now and get it all back in 50 years tax free rather than getting it taxed in 50 years.

You just answered your own question. You want a Roth IRA, as distributions are tax free come retirement.

As the tax laws exist today. Caveat emptor applies. Not trying to be an ass, just a little food for thought. Things can change. No reason to sit on your hands though.

 

[sciencewhiz]

With less then $3000 of earned income, you won't be able to purchase any Vanguard mutual funds because of the minimum initial investment. That will probably be a problem anywhere.

I think it would be best to open the Roth IRA at a discount broker and buy ETFs. Sharebuilder has no minimums. VTI is the ETF equivalent of VTSMX (recommended above). Once you get some real earnings, you could roll your brokerage IRA into vanguard/fidelity mutual funds.

 

[dud]

Originally posted by: txrandom
I was trying to remember that forum mariok, thanks!

I have about a 30k in a CD that expires in October. My grandparents gave me a 20K gift. I'm pretty sure I don't have to pay any taxes on it, but they may have to pay taxes. I thought I read somewhere that any gifts lower than or equal to 20k were not taxed, but the tax wouldn't be my liability anyways. For about the past five years, it has been building interest, and I have added a majority of my income.

In five weeks, I'll be in Europe for five weeks, so getting a job for the summer is going to be difficult. I actually just quit my job yesterday. I guess college is a good time to add to my retirement account. My income is hardly taxed, and most of my college expenses are paid by my parents or scholarships. This allows me to put most of my income in savings. I'm guessing my parents get some tax deductions by paying for my education? Sounds like a win-win for me and my parents. Well besides the fact that they are paying for my college...but I'll repay them one day.

Thanks for all the links. I'm going to check out the Vanguard and Fidelity funds and get some knowledge from my parents as well.

txrandom,

You might want to check into that. Back in the 90's my parents were going to gift monies to my brother and I and found out that the max they could gift (after-tax dollars) was $15K before I would have to pay any taxes on the gift. if that IRS rule may still hold so you may be liable for the tax on that additional $5K. I suggest that you look into the law ... not pay the taxes. If taxes are do from a aprt of the gift just wait to see if the IRS notices. If they do they'll let you know ...

 

[Special K]

Originally posted by: sciencewhiz
With less then $3000 of earned income, you won't be able to purchase any Vanguard mutual funds because of the minimum investment. That will probably be a problem anywhere.

I think it would be best to open the Roth IRA at a discount broker and buy ETFs. Sharebuilder has no minimums. VTI is the ETF equivalent of VTSMX (recommended above). Once you get some real earnings, you could roll your brokerage IRA into vanguard/fidelity mutual funds.

I believe they allow you to invest in the STAR fund via small monthly bank withdrawals.

 

[sciencewhiz]

Originally posted by: Special K

Originally posted by: sciencewhiz
With less then $3000 of earned income, you won't be able to purchase any Vanguard mutual funds because of the minimum investment. That will probably be a problem anywhere.

I think it would be best to open the Roth IRA at a discount broker and buy ETFs. Sharebuilder has no minimums. VTI is the ETF equivalent of VTSMX (recommended above). Once you get some real earnings, you could roll your brokerage IRA into vanguard/fidelity mutual funds.

I believe they allow you to invest in the STAR fund via small monthly bank withdrawals.

It still has a $1000 minimum, less then a usual vanguard mutual fund, though.

 

[overst33r]

Originally posted by: sciencewhiz
With less then $3000 of earned income, you won't be able to purchase any Vanguard mutual funds because of the minimum investment. That will probably be a problem anywhere.

I think it would be best to open the Roth IRA at a discount broker and buy ETFs. Sharebuilder has no minimums. VTI is the ETF equivalent of VTSMX (recommended above). Once you get some real earnings, you could roll your brokerage IRA into vanguard/fidelity mutual funds.

He just needs $3000 to OPEN the account... The minimum contribution after that is $50 or even $0 I believe...

 

[sciencewhiz]

Originally posted by: mariok2006

Originally posted by: sciencewhiz
With less then $3000 of earned income, you won't be able to purchase any Vanguard mutual funds because of the minimum investment. That will probably be a problem anywhere.

I think it would be best to open the Roth IRA at a discount broker and buy ETFs. Sharebuilder has no minimums. VTI is the ETF equivalent of VTSMX (recommended above). Once you get some real earnings, you could roll your brokerage IRA into vanguard/fidelity mutual funds.

He just needs $3000 to OPEN the account... The minimum contribution after that is $50 or even $0 I believe...

Correct, but since he doesn't have $3000 of earned income, he can't open the account, which is why he needs a fund with a lower minimum (STAR) or a brokerage with no minimums purchasing ETFs.

 

[Beattie]

Originally posted by: mariok2006
FWIW, I suggest the VFIFX 2050 Target Retirement fund. Low expense ratio and well diversified. Just set it and forget it.

These targetted funds are pretty terrible.

 

[Special K]

Originally posted by: Beattie

Originally posted by: mariok2006
FWIW, I suggest the VFIFX 2050 Target Retirement fund. Low expense ratio and well diversified. Just set it and forget it.

These targetted funds are pretty terrible.

Why do you say that?

 

[hiromizu]

Originally posted by: Special K

Originally posted by: Beattie

Originally posted by: mariok2006
FWIW, I suggest the VFIFX 2050 Target Retirement fund. Low expense ratio and well diversified. Just set it and forget it.

These targetted funds are pretty terrible.

Why do you say that?

Yea..please inform me ol' wise one.

 

[Beattie]

Originally posted by: hiromizu

Originally posted by: Special K

Originally posted by: Beattie

Originally posted by: mariok2006
FWIW, I suggest the VFIFX 2050 Target Retirement fund. Low expense ratio and well diversified. Just set it and forget it.

These targetted funds are pretty terrible.

Why do you say that?

Yea..please inform me ol' wise one.

For 2 reasons. First they use junk like bonds that underperform. Second they don't let you control what you are investing in. If you just bought the components of that type of fund, you'd be able to not buy the crap that underperforms and just stick to the good mutual funds and stuff.

That VFIFX fund for example only (aside from the fact that it doesn't have a long enough history to invest any long term money in to begin with) yielded like 1% a year. It also lost 2.93% ytd. You should be making closer to 12% every year.

http://quicktake.morningstar.c...untry=USA&Symbol=VFIFX

 

[Fern]

Originally posted by: txrandom
II have about a 30k in a CD that expires in October. My grandparents gave me a 20K gift. I'm pretty sure I don't have to pay any taxes on it, but they may have to pay taxes. I thought I read somewhere that any gifts lower than or equal to 20k were not taxed, but the tax wouldn't be my liability anyways.

Only the donor (giver) pays any (gift) tax on gifts made. There is no "income tax" on gifts received.

As a recipient, you will not have to pay tax on any gifts received.

As regards $20K etc, these are somewhat complicated rules that apply to your grandparents and not you. Unless you're just curious, know that they won't pay any gift taxes until their cumulative gifts exceed $1 million (and I've even simplified that because they're taking advantage of the annual exclusion amount and gift-splitting.).

Fern