23 yr old interested in a Roth IRA

[JosephC]

Hi all,

I'm 23 years old, currently only investing in my 401k towards retirement. I am investing 18% of my paycheck into the 401k, with an additional 6% company match and a pension (not vested for another 3.5 years). Current balance in the 401k is around 17k with my age in % bonds and (100-age)% in mutual funds.

My question is, I want to start a Roth IRA account. I'm leaning towards Vanguard. Is the STAR fund a good option in my situation?

When does my $5,500 contribution refresh (aka, I can put another $5,500 in)? Is it a specific date?

Anything else I should be considering regarding a Roth IRA at my age?

Thank you for the help!

 

[Senator]

The Roth is an annual contribution. For 2013, you have until 4/15/14. So, you can do 2013 and 2014 today.

Just go for an S&P stock fund.

 

[Sue J]

STAR was my first fund because the minimum was only $1000. It's a fund made up of other funds. Look into the details at Vanguard and learn about other funds and see what you like. You can have more than one fund in your ROTH. You can start with $1000 in STAR and then when you get to $3000 you can move it to another fund. You can contribute all at once or in lumps throughout the year or at year end. Or you can contribute the same amount every month, known as Dollar Cost Averaging.

You are SMART to start this at 23. It's so hard to think really looooong term at that age. In a ROTH all your accumulated gains will be tax free which is a huge advantage over a traditional IRA. Your contributions can be withdrawn at any time, but any gains will have to stay until age 59.5 or you pay a penalty.

Congratulations on having excess income to invest. You are miles ahead of many people in your age bracket.

 

[Arifriekinel]

I am curious about the STAR fund as well. Am I right in understanding from the other post that once I have more than $1,000, I should move it right away, so there's no reason for me to do that one if I have more?

I'm currently $1,000 in Target Retirement 2050 and the rest all in VDIGX Dividend Growth. I'm around the same age as JosephC, are those colossally terrible choices for our age group?

 

[InParadise]

Hi all,

I'm 23 years old, currently only investing in my 401k towards retirement. I am investing 18% of my paycheck into the 401k, with an additional 6% company match and a pension (not vested for another 3.5 years). Current balance in the 401k is around 17k with my age in % bonds and (100-age)% in mutual funds.

My question is, I want to start a Roth IRA account. I'm leaning towards Vanguard. Is the STAR fund a good option in my situation?

When does my $5,500 contribution refresh (aka, I can put another $5,500 in)? Is it a specific date?

Anything else I should be considering regarding a Roth IRA at my age?

Thank you for the help!

Joseph, congratulations on starting your retirement investing this early. In my opinion the biggest thing at this point is getting the money into the Roth and continuing to max out your 401K, building good saving habits that will bring you to financial independence. You are time limited on getting the funds in there, because as others have chimed in, there are limits to when you can do so. Until 4/15 you have the ability to put funds into a Roth for both 2013 and 2014.

Next you need to not ever take the funds out of the Roth, except in the most extreme cases. Let it build. Also focus on building an emergency fund, so that you have the cash on hand to deal with those extreme cases without tapping the IRA. This delayed gratification of saving is hard, but 15-20 years down the road, when the company you are working for is doing layoffs and your industry is not hiring, you will know that you don't have to panic.

There is much written out there about how hard it will be for your generation to retire, but if you have the savings mentality, pay your future first, the ACA gives your generation the ability to walk away from company provided group health care. We probably would have retired 10 years earlier if we had that opportunity, rather than follow the companies that provided retiree health care. I am excited about the opportunities ahead for our kids and the freedom the ACA will give them in self-determining the route they take. There is no better time than now to grab hard on to investing in your retirement, given that the barriers to health insurance are being broken down.

 

[steelyman]

I am curious about the STAR fund as well. Am I right in understanding from the other post that once I have more than $1,000, I should move it right away, so there's no reason for me to do that one if I have more?

I'm currently $1,000 in Target Retirement 2050 and the rest all in VDIGX Dividend Growth. I'm around the same age as JosephC, are those colossally terrible choices for our age group?

I used STAR when Roths were created (1998?). You could do a lot worse. It's important to get it started due to the 5-year rule. If you can afford more, that would be nice.

 

[timwalsh300]

Arifriekinel, people used to recommend Vanguard's STAR fund to new investors because it had a lower minimum (at $1,000) than other Vanguard funds. It's better than what you might find at other mutual fund shops, but it's more expensive (at 0.34% ER) than all of Vanguard's other balanced funds. Now you can get into Vanguard's Target Retirement funds with only $1,000, so I think those are better choices at 0.16-0.18% ER.

Vanguard's Dividend Growth fund is not a "colossally terrible choice," but I think you can do better. Why pay 0.29% ER for a bunch of large-cap, US stocks when the Total Stock Market Index fund costs just 0.05% ER with Admiral Shares?

Tim

 

[Animorph]

A Roth IRA is pretty much a no brainer for funds that would otherwise be in a taxable account. If the tradeoff is between a 401k contribution or a Roth contribution, then your tax rate now versus your tax rate after you retire is the key. Current tax rates equal to or lower than in retirement favors the Roth.

 

[Turboslacker]

Joseph, you are way too young to be posting on this Forum. Go away...you are making us feel as old as we are. LoL.

Keep up the great early investing!!

 

[Tortoise]

I have to agree with both timwalsh300 and Turboslacker. Keep your investing expenses as low as you can. Vanguard's Total Stock Market ETF has an expense ratio (ER) of 0.05%. Annual expenses, such as ERs reverse compound over time and can cost you a lot over the course of 30 years. And yes, you are making me feel old. You'll get great investment advice here, but you'll get more investment advice over at bogleheads.org. (Many of us are bogleheads, too.) At least read their "Getting Started" wiki page.

 

[JosephC]

Thanks everyone for the responses, these were helpful. I presume from reading above, $3,000 is the minimum with non-STAR investments? My plan would be to keep it in STAR until I reach the $3,000, then transfer to S&P 500 equivalent vanguard fund.

I will keep investing. I own the bogglehead book and have read it and watched the online videos. My parents have ingrained saving in my head since I was born and it turns out they needed to retire sooner than expected due to health reasons. After seeing the freedom they have by saving young, I would never consider doing anything else. I get enjoyment out of finding the best deals... it's a challenge, and a fun one.

 

[Sue J]

Yes, you've got that correct. Someone else here mentioned $1000 in a Target Retirement fund. That may be a recent change to make the minimum in the Target retirement funds at $1000. When I started STAR was the only one.

 

[timwalsh300]

I presume from reading above, $3,000 is the minimum with non-STAR investments?

No. Vanguard's Target Retirement funds have the same $1,000 minimum. And they cost less than STAR, which is the only predictor of mutual fund performance. You could just pick one of those and leave the money in there forever.

Tim