<p>I began investing in three index mutual funds very early during 2011. The mutual funds are in a taxable account, because I was unsure whether or not to store the mutual funds in a Roth IRA or traditional IRA when initially began investing. I will not graduate with any student loan debt nor do I carry any other consumer debt of any kind. My investing goals are to save for major future expenses such as buying a car, home, and saving for retirement. Should I sell my mutual fund shares and reinvest the proceeds into a Roth IRA or traditional IRA? Or should I keep aside my taxable account and separately start some type of IRA? I have less than $1000 in the taxable account.</p>
<p>If your income is so low that you pay very little in taxes, a Roth IRA is a great idea if you’re saving it for retirement. But taking the money out before retirement has all kinds of tricky rules. If you’re paying taxes on your income and want to salt away up to $10,000 in a regular IRA and then withdraw it to buy your first house I think you can withdraw up to that amount for that specific purpose without penalty (although you’ll have to pay regular income taxes on the withdrawal.) If you’re not paying income tax yet and you’re anticipating using the money within 5 years or so I’d recommend just keeping it in a taxable account.</p>
<p>Do you have any other savings? Even if you have a job set up after graduation, you will still need to find a place to live (and usually pay 2 months rent up front) and furnishings, and work clothes, and transportation. If you don’t have a job set up yet, it may take a while to find one, and it may take money to get to interviews. The rule of thumb is to have six months of expenses in an emergency fund - if you don’t have that, I would wait to put money into an IRA until I had a full time job.</p>
<p>Most IRA accounts require a minimum investment of $1000 or more, so you may not have enough to do either types of IRA accounts. A Roth is a better choice for someone who has many years until retirement - only people putting money in close to retirement should use a traditional IRA.</p>
<p>If you have enough to start an IRA, it is your choice. When you sell the mutual fund to convert, if your yearly income is over 4K, including the gain on the mutual funds, you should file taxes, so you may lose part of the mutual fund profit. Check with an accountant.</p>
<p>Thanks for the remarks. I have around $3500 in much more liquid assets, and I do have a well-paying corporate internship lined up this summer with an anticipated full-time offer at the end of the summer.</p>
<p>It is great to think of retirement savings and a roth or traditional IRA is a good thing to start funding (and if the company you work for offers a 401k, go for it, especially if they have matching! Great way to save because you never see it, and it grows…).</p>
<p>However, you also should put money into some sort of regular savings, whether in stocks, bonds or some mix (CD’s right now pay crap, not worth it) and once working likewise put money into those kind of investments. If you have the goal of saving for a house or car and given you age, my recommendation would be to put it into a mix of ‘safe’ investments like bond funds or muni funds (which can be triple tax free), and a larger swath into more agressive funds. My recommendation? If you want to be like the baby on the E-trade ad, take some percentage of your money to invest yourself in stocks and such, go to it, but most of your investments IMO (as someone who has worked in the industry for 25 years) would be to do your research and put it into agressive mutual funds, ones betting on small caps and such or global. The way the markets exist today, which are driven by algo systems and rapid/flash trading, small investors are not going to be able to outmatch the pros, and the people running those funds have all kinds of firepower you don’t have, take it from me (yeah, I see the commercials for TD waterhouse and E-trade with the investment tools and the like, how they will ‘turbocharge your experience’ and the like, that is marketing hype…). Given that you are young, by taking an aggressive stance with your fund picks, you are likely over the time period when you are starting out, of in the end outpacing the performance you would do yourself or with less agressive funds…you want to have a core of savings in more pokey/safer investments, maybe go 75% aggressive and 25% safe (least that is what I would do, and did when I was younger). </p>
<p>I commend you on your mentality, get into the saving habit and it is one habit that isn’t bad for you:)</p>
<p>Will your brokerage allow you to recharacterize your account as a Roth IRA? The Roth has always seemed too good to be true, and I have heard several investment professionals say they think it will be phased out as an option for new investors. You’ve probably seen the graphs that show if you invest a fixed amount monthly for 5 years in your twenties and never put in another penny you will have much more at retirement than someone who invests twice as much monthly beginning at a later age. Can’t remember the details, but the take home message is that 25 is not too young to be thinking of retirement. I like index funds in the Roth (Vanguard small cap) because if you end up with a loser individual stock you can’t claim the capital losses. My D has a Roth with E-trade and there is no account minimum. She funds it with babysitting money.</p>
<p>I told DS, 26, recently that in today’s world, a person needs at least 12-24 months of cash or short term secure investments for unemployment or emergencies… You need to discover at what level of living can you survive without outside income, 12 months minimum.</p>
<p>He thinks he is pretty smart-he is too. But I discovered a $11,000 error in 10 seconds. I looked at his statement that he was also looking at. He took a loan out, and he didn’t know it - for 20 months. He gets on line statements and never bothered to look. He can afford this error but can you afford and recover from a $1,000 error, or suppose this future internship falls apart?</p>
<p>And yes a promised internship or promised job can fall apart. Has happened to DS just a week before he was supposed to start.</p>
<p>From what I understand, I don’t believe it is possible to recharacterize my taxable account as a Roth IRA. That would be incredibly useful, but I believe my broker (Schwab) told me that isn’t possible. Does anyone else have any information on this?</p>
<p>What’s the rationale behind phasing out the Roth IRA? Do industry professionals think that the Congress might do away with them in an effort to increase tax revenue?</p>
<p>Your best bet to understand the Roth vs traditional IRA would be to sit with someone at a Fidelity or Charles Shwab office. They are on salary and will not be incentivied to sell you something you don’t need. </p>
<p>My advise is that until you have a secure full-time job, you shouldn’t worry about retirement yet. I also agree with the statements above that you need liquidity - I have heard 6 months of expenses is a good rule of thumb, however people have different definitions of liquidity. I do not consider it desirable to call equities (stocks) liquid, as you may not want to sell in a down market. </p>
<p>Also watch out for the tax hit you can take on some mutual funds. Even in a down year, they can generate taxable income through trading. Index funds generally produce lower taxable income, as their investment base is more stable.</p>
<p>It is from the late 90’s, when stock markets were still providing good returns. The Roth has become so popular, especially now that a provision allows conversion of a regular IRA to a Roth, that I doubt it will be phased out anytime soon. </p>
<p>The Schwab reps are pretty helpful with account questions. I seem to recall that when you fill out the forms to open a new type of account you are given the option of transferring shares from an existing account without having to sell them.</p>
<p>Not sure I would consider Schwab reps unbiased, as Schwab has many proprietary investment products they will steer you toward.</p>
<ol>
<li><p>Listen to your adviser. If you don’t agree-change the adviser. </p></li>
<li><p>The regulations for IRA are well known and fairly simple. If you do not understand the regulations and conditions, you have no business in doing an IRA. When you opened the IRA you should have received a detailed explanation of an IRA. That explanation is a uniform explanation conforming to IRS regulations.</p></li>
</ol>
<p>P.S. Why is that young people are asking for professional advice that was given to them, but do not believe it and seek layman advice? Saving and investing for retirement is good but only if you take care of the basics of financial planning and due diligence. </p>
<p>The incident for my DS. Can’t scold him. His mother asked what should we do? I said nothing…He realized that he’s instantly $11,000 poorer and has paid a penalty of interest. Pretty expensive lesson.</p>
<p>Finally, as someone at retirement age, who’s had an IRA since 1982, I’ve seen our funds drop 40%, 3 times and no way to recover except to put more money into the IRA/401k and wait it out…However, a trading account I could’ve taken tax losses.</p>
<p>How did he make this error, LP? I am not sure I understand.</p>
<p>Sligh-
Congrats on our being debt free and wanting to save for the future. Excellent mentality. My s (if you read the thread about this) is now taking over the management of his savings/investments. They are in a brokerage account with a mixture of (IIRC) stocks (he chose the 2 stocks and they are doing ok), a Tax exempt money market, a mutual fund and a Roth IRA. He also has savings bonds and they are earning decent interest (the Series I bond is earning 8% interest!). He has an online savings account but he plans to move that money to the tax exempt money market account. We agree that he needs to keep about 6 mos of living expenses liquid. I think having 12mos or more is more than necessary. However, its a fine goal to have. Congrats and good luck!</p>
<p>Once you have your 6+ months of expenses in cash or equivalents set aside and you are ready to invest additional funds, as standard rule of thumb is the percent of equity exposure is 100 - your age. (eg/ If you are 25, then you can have 75% equities). Another consideration is if your employer offers a 401k. As long as you can swing it from a cash flow perspective, always contribute as much as you can.</p>
<p>Longprime, I have not opened an IRA. I understand the regulations and mechanics of both the Roth and traditional IRA vehicles. While I appreciate your advice, I feel like you are assuming a little too much. I have not yet consulted with an advisor (although I did ask once over email with Schwab if a taxable account can be converted into a Roth IRA) and am only seeking the kind advice of CC parents first. I have been on these forums for nearly 5 years and value parents’ advice and opinions; they are often very knowledgeable. Of course, I’ll consider what the experienced parents have to say and then move on to a discussion with my advisor.</p>
<p>Roth IRA is really the way to go. They’re very simple to setup with any of a wide range of providers and there are minimal rules to worry about. The main rules are:</p>
<ul>
<li><p>You can only contribute up to (for 2011) $5,000, but</p></li>
<li><p>Roth IRAs are limited to those with higher incomes (above $107,000 modified AGI) and those with high income (above $122,000 modified AGI) can’t participate in Roth IRAs–although money put in a Roth before said person became a high earner can stay put.</p></li>
</ul>
<p>Removing “earnings” from a Roth before retirement age incurrs a stiff tax penalty, but the “principal” (what you put in) can be removed at any time without penalty.</p>
<p>Because of that last point it makes sense to contribute to a Roth even if you don’t have the full emergency fund set aside. These days people should have about 12 months of expenses sitting in cash savings, but if you have at least a few months set aside then putting money in a Roth allows ou to save for retirement while still leaving money available for an emergency. However that Roth money can lose value so it’s best to always have some cash savings on hand.</p>
<p>They key to these programs is that you have a series of finite windows to put money into these tax sheltered accounts. After the deadline for a year passes that window closes for good so it’s best to start early and keep putting I whatever you can month after month regardless of what the market is doing.</p>
<p>Taxable investment accounts should on,y be used if the tax sheltered versions (IRAs and 401ks) are all maxed out.</p>
<p>A bit irritated and a bit harsh on you.
I’ve seen too many families who did the IRA and 401k without adequate cash reserves.
Understand the penalties VERY carefully: Black swans are more prevalent than you think.</p>
<p>Families that I’ve seen, have a liquidated IRA that yields them just 50% of the value if they had left funds in the IRA. If they are lucky, the IRA liquidation was not in a down market.</p>