Part-time Young Worker - 401K Roth or IRA?

[aim-high]

My daughter, 21, has a part-time job and has access to a 401k. She can contribute to a Roth or an IRA version.

Her income is going to be around $12,000. She is a dependent on my taxes and a full-time student.

My thinking is she should max out what they allow her to contribute to the Roth.

Make sense?

 

[Animorph]

Check the tax math since she's your dependent. I think her income could mostly be taxed at your rate. No brainer for the Roth if she's paying 0%-10% taxes by herself or through you. Or if you pay her taxes in this case.

 

[Whisper66]

I've suggested to all my three children that they max out their Roth as the highest priority. My concern with IRA version is simply that I have to believe that tax rates of the future when they pull out their money will be much higher than it is today as a result of our country's current debt situation and lack of any alternative realistic solutions. Just one person's opinion though.

 

[pb4uski]

The Roth is the way to go... a traditional 401k might actually be suboptimal since she is in a low tax bracket now and will presumably be in a higher tax bracket at retirement.

According to Taxcaster, she'll be in the 10% bracket with $12k of income so if she is in the 15% bracket or higher when she withdraws it is a bad deal.

That said, I think the max is too much. If she contributes 10% or so it will instill in her the idea that part of your income should be saved for the future but hopefully she won't feel it as a huge constraint.

 

[hnzw_rui]

Another vote for Roth. However, if she's not getting an employer match or if she's not going to be working long enough for the match to be vested, I suggest maxing out a Roth IRA first before contributing to a Roth 401k. Contribution limits for 2015 are $5,500 for IRA and $18,000 for 401k.

 

[RE2Boys]

Check the tax math since she's your dependent. I think her income could mostly be taxed at your rate. No brainer for the Roth if she's paying 0%-10% taxes by herself or through you. Or if you pay her taxes in this case.

Kiddie tax would only apply to investment income of the dependent greater than $2,000. Does not apply to earned income of the dependent.

Another plus for funding a Roth account instead of participating in the 401k, she's in a low tax bracket currently. And she needs to be under 24 the whole year for you to claim her as a dependent. Oops, you already covered that.

 

[Slow But Steady]

Will your daughter get an employer match? If not, I'd suggest just investing in a Roth IRA. High fees can be a real drag on small 401K balances, so if there's no match, just say no.

(This happened to my son when he was working while going to school. Once the money was in there, there was no way to get it out and stop paying the fees until he left the job.)

 

[pb4uski]

Good point that if there is no match and investment options are not the greatest that a roth IRA might be preferable to participating in the employer's Roth 401k.

 

[Rothman]

Hmm you can probably guess my opinion, Roth all the way, many many years of compound growth tax free forever!


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[Mulligan]

Hmm you can probably guess my opinion, Roth all the way, many many years of compound growth tax free forever!


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All I know is if I had a friend named Rothman who beat the hell out of me every time I did not make a max Roth contribution, I would have a bigger stash of cash! Only because of flexibility issues do I still not kick myself in the rear for not doing this every working year. But I at least tried to make amends by working just enough the past 5 years of retirement to make up for some of those years I didn't.


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