[cuzg8tor]

I am trying to help my grand daughter make a good retirement savings decision. She is a new employee in the health field (graduated from college last year). Her company does NOT match her 401K contributions. It seems Roth's are more flexible with future withdrawals (not as restrictive as 401ks) but who knows what the tax structure (may negate their advantage) will be when she is able to withdraw her funds tax-free?

She only makes $32,000 per year so could probably use the immediate tax relief of a conventional 401K. She is single, 23 and is not thinking about getting married in the near future. She has done a pretty good job of funding her emergency fund so far in her first year of work. Her only bills are $300 per month for rent (she lives with us), her $275 car payment, telephone bill, car insurance and about $300 per month towards her Masters studies (she has no student loan from undergraduate school). She can probably contribute $300 per month to her retirement at this time.

It seems to me that a prudent move at this juncture might be to split her contributions 50/50 between the non-matched company 401k and a Roth IRA. However, I certainly am not a financial professional and would very much be interested in inputs from you folks as to what you think she should do.

I noted on one post that an individual said he invests in a Vanguard VT1 index fund that levies no commission charges? Does this make sense? If they charge no commission charges how do they make money? Would appreciate inputs as to which investment vehicles she should put her money. Any suggestion for excellent financial advisor for her here in The Villages? Thanks in advance for any inputs to help this wonderful young person that God has blessed us with.

[Ragman]

Originally Posted by cuzg8tor

I am trying to help my grand daughter make a good retirement savings decision. She is a new employee in the health field (graduated from college last year). Her company does NOT match her 401K contributions. It seems Roth's are more flexible with future withdrawals (not as restrictive as 401ks) but who knows what the tax structure (may negate their advantage) will be when she is able to withdraw her funds tax-free?

She only makes $32,000 per year so could probably use the immediate tax relief of a conventional 401K. She is single, 23 and is not thinking about getting married in the near future. She has done a pretty good job of funding her emergency fund so far in her first year of work. Her only bills are $300 per month for rent (she lives with us), her $275 car payment, telephone bill, car insurance and about $300 per month towards her Masters studies (she has no student loan from undergraduate school). She can probably contribute $300 per month to her retirement at this time.

It seems to me that a prudent move at this juncture might be to split her contributions 50/50 between the non-matched company 401k and a Roth IRA. However, I certainly am not a financial professional and would very much be interested in inputs from you folks as to what you think she should do.

I noted on one post that an individual said he invests in a Vanguard VT1 index fund that levies no commission charges? Does this make sense? If they charge no commission charges how do they make money? Would appreciate inputs as to which investment vehicles she should put her money. Any suggestion for excellent financial advisor for her here in The Villages? Thanks in advance for any inputs to help this wonderful young person that God has blessed us with.

The 401K should be looked at very closely with no match. Many times choices of investments are restricted and fees are high.

Depending on her marginal tax bracket a Roth Ira at a Fidelity , Vanguard, or Schwab may be the best choice. I don't know if she could contribute to an individual IRA or not since her company offers a 401K.

She should talk to the brokers above (or others) and remember broad indexes with LOW fees and consistent investing is the best formula for future success.

A lower amount early in life is much better than a lot later on. Compound return is magical.

[rjm1cc]

If the 401k fees are reasonable, lets say under 1%, I would put some money in it. The reason is it happens automatically. I would also put money in the Roth. Especially if her current taxes are low.
However, If she can have her payroll department deposit a contribution to her Roth then I would max out the Roth and if there are additional funds do the 401k. She might need a checking account at a broker and her payroll dept could deposit to that if they will not do the Roth.

[AmyBob]

I'd agree with rjm1cc yet also suggest looking at form 8880. If her AGI is under 29,500 and files single her contribution would yield a 10% tax credit. That could be $360 back for free! With her income at $32,000 she would need to put her $300 monthly contribution into the 401k or a deductible IRA to get her AGI below the max of $29,500. The Roth won't lower the AGI

As her salary rises this credit will not apply but consider it for the current year. Then resume a Roth-first strategy in the future.

[jmvalcq]

Some companies offer the Roth program within their 401k, that would be the best of both worlds, payroll deductions and tax free future distributions. With an income of 32k it may be better to pay the tax now on the money put into the Roth and receive tax free distributions on the growth 40 years from now on a lot larger amount of money.

[er9027]

In my opinion she should definitely put money in a Roth. TAX FREE money at withdrawl at retirement. At her age would be a no brainer. How much she puts toward the roth is the question. Put what ever she can live without. She won't get to use it until 59 1/2 assuming law doesn't change. Good Luck.

[cuzg8tor]

Thanks to everyone for your words of wisdom. Will help her get started on the right foot. I will continue to monitor thread for further advice. FYI, she will have education deductions that will keep her AGl below 29K.

[l2ridehd]

Your 50/50 suggestion is probably the best. Check 401K expense ratios and if they are over .35% go 100% Roth and chose a very low cost fund at Vanguard, Schwab or Fidelity to place the funds in. No one can predict what future tax implications will hold for her when she retires so having money in both is the best solution. However only if it makes sense from an expense view. A Roth can be done for .10% at one of those investment agents. Personally I prefer Vanguard as they continue to lower expenses every year. The others do it, but only because they have to to stay competitive with Vanguard. Go with a very broad based fund like a target 2050 retirement fund or Total Stock Market fund.

[justjim]

First, she needs to find another employer---for obvious reasons. That being said, I would advise her to put as much into a Roth as she can afford.

[Certified Financial Group]

First of all, I commend you for taking your granddaughter under your wing. You both sound special.

Based on the information given, she is solidly in the 15% tax bracket. That being said, she needs to gross about $1.18 for every dollar that she puts into a Roth because she gets no tax deduction. ($1.18 -15% = $1).

Conversely, it would only cost her .85 to put $1 in the 401(k) because of the tax savings. Now I know the current thinking is she will be able to take the money out tax free at retirement. That's true....if the tax laws in 40 years are the same as today. No one can guarantee that. We may have an entirely new tax structure - a value added tax, a flat tax, or the Fair Tax.

My fear is that the Roth's will ultimately be subject to some form of means testing as Social Security is today, i.e., if your income is over $34000 for an individual, up to 85% of your SS is taxed. Many don't remember that at one time SS was totally tax free until the government needed more tax revenue. That pile of billions of untaxed dollars that the "wealthy" will have accumulated makes an inviting target. Just some food for thought.

Of course, this recommendation assumes that the fees are reasonable and the investment choices are good in the 401k. A deductible IRA from Vanguard (VFINX) is probably a better choice. She can put in up to $5500 (net cost $4675) and keep it when she leaves her current job.

Vanguard charges no fees for the IRA but has low management fees on their funds.

[cuzg8tor]

We found out that the 401k admin costs are .8%. Company does offer automatic deductions for a Roth IRA in addition to the 401K. In 2013 she made $24k which put her in the 15% tax bracket with a 12% effective rate (she had a $14,600 AGI). She paid $2500 taxes, owed $1700 and got a $800 refund. This year (2014) she will make 32,000.

With this information, it seems she should put her money in the Roth since her taxes are low (Our logic is you put money in the 401k to save taxes today). Perhaps later when her taxes are higher, she should go to the 401k.

Since she is only 23, she should be moderately aggressive with her investment options. We are thinking along the lines of 80% stocks and 20% bonds. Her company offers:
Alger midcap growth
DWS Intl fund
Janus Adviser large cap growth
PIMCO total return fund
American beacon large cap value fund
Neuberger Berman Focus fund
SSgA S&P 500 Index Fund
and various conservative mostly bonds, investing vehicles

we like the aggressiveness of the Alger growth fund, the broadness of the S&P 500 for diversification and the bonds for risk reduction through asset allocation. Are we on the right track in your opinion or do we not understand? Please, we are learning and any advice will be greatly appreciated.