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Invest in index fund now or wait for correction?
Old 11-18-2017, 11:08 AM   #1
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Invest in index fund now or wait for correction?

If you opened a Roth IRA for a 12 year old today (funded with babysitting money) would you leave any portion of it in a money market and wait for market correction before buying index funds or invest it all now?
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Old 11-18-2017, 11:12 AM   #2
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I assume this is long-term saving, as in no withdrawals until some 50 years in the future, so I'd get that money all in now.
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Old 11-18-2017, 11:14 AM   #3
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Unless you have a crystal ball that is more accurate than everyone else, how do you know when a correction is:
1) starting
2) continuing
3) bottomed out

You can do some deposits over time,but I would just get it all in now. A Roth for a 12 year old will have nearly 50 years to grow. I doubt any recent events will have much effect after 50 years. Yes, it seems the market is high right now and majority of news is claiming a correction is due. It would be nice to pick that bottom and buy what seems to be on sale prices compared to now. But how do you know when that is? My recommendation is just put it in and let it ride the wave over 50 years.
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Old 11-18-2017, 11:18 AM   #4
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Why in the world would a 12 yo want to encumber their money in a Roth for 47 1/2 years? Especially since they are not paying taxes now since in both cases growth would be tax free.

Put it in Total World Stock or Total Stock in a taxable account for now... they will have more flexibility on using it and can always use the balance for a Roth later when it makes more sense.
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Old 11-18-2017, 11:53 AM   #5
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Many here would suggest you determine an asset allocation for this money and stick with it. Ignore what you think about market values and trying to time the market. There are many errors you can make by trying to time the market.

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Old 11-18-2017, 01:51 PM   #6
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I'd vote for all in on the Roth, buying 100% equities like a worldwide stock fund.

Trying to market time, win or lose, teaches the 12YO bad habits. Things that subsequently happen in the markets, good or bad, can be used as teaching moments.

Using a Roth teaches the segregation and, hopefully, inviolability, of retirement funds. I think this value overrides @pb4usi's excellent financial points.

If I were doing this Roth, I would work with the 12YO put 100% of his/her earned income into the account, subsidizing as necessary from my wallet. Having 50+ years of compounding is a wonderful prospect.
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Old 11-18-2017, 02:30 PM   #7
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Quote:
Originally Posted by pb4uski View Post
Why in the world would a 12 yo want to encumber their money in a Roth for 47 1/2 years? Especially since they are not paying taxes now since in both cases growth would be tax free.

Put it in Total World Stock or Total Stock in a taxable account for now... they will have more flexibility on using it and can always use the balance for a Roth later when it makes more sense.
In my case it's my 16 yr. old, and it went into Schwab index funds- 1/3 in each of total US, small cap and Intl.

Grant the point about financial flexibility, but:
1. I'm making the contributions - she maintains the flexibility, I start the wealth transfer early.
2. Hard to beat 40+ years of compounding.
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Old 11-18-2017, 04:19 PM   #8
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Originally Posted by pb4uski View Post
Why in the world would a 12 yo want to encumber their money in a Roth for 47 1/2 years? Especially since they are not paying taxes now since in both cases growth would be tax free.

Put it in Total World Stock or Total Stock in a taxable account for now... they will have more flexibility on using it and can always use the balance for a Roth later when it makes more sense.
I had to read this a second time to get it: putting it in a taxable account now allows for more flexibility. I agree.

But maybe flexibility isn't desired. For instance, and I don't know that this is the case, but say the baby sitter got to keep/spend their earnings, and parent/savvy understander of compound interest and taxes matches the baby sitting funds, places it in a Roth with the understanding that it's not to be touched for 47 1/2 years. Of course at the age of majority, the "youth" can do with it what they wish, including taking it all out and paying penalty and taxes on the gains.
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Old 11-18-2017, 04:25 PM   #9
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I guess the issue that I have is that if these funds are later needed for college, a car, or something sensible they'll be locked up in the Roth or subject to penalty if they are used. While I am obviously a big proponent of retirement saving, you still need to use a little common sense. But on the other hand, it's really hard to judge not knowing more about the facts and circumstances.

If you want to encourage a young loved one to save and invest, you can still match or do something in a taxable account... if it is needed and used then it reinforces the point of saving for big goals
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Old 11-18-2017, 04:27 PM   #10
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I had to read this a second time to get it: putting it in a taxable account now allows for more flexibility. I agree.

But maybe flexibility isn't desired. For instance, and I don't know that this is the case, but say the baby sitter got to keep/spend their earnings, and parent/savvy understander of compound interest and taxes matches the baby sitting funds, places it in a Roth with the understanding that it's not to be touched for 47 1/2 years. Of course at the age of majority, the "youth" can do with it what they wish, including taking it all out and paying penalty and taxes on the gains.
Exactly the situation with my 16 yr. old grocery bagger.

Her earnings are hers, and I match her gross earnings in the Roth. She was the first to raise the idea of putting money in a Roth. Made it easy for me to do what I intended all along.

What happens with the account when she's 21 will be her choice. I have shared our history of saving since the 80's, and she sees the results of that everyday.
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Old 11-18-2017, 07:31 PM   #11
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I suck at market timing so I'm always all in
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Old 11-19-2017, 12:26 PM   #12
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I'd go all in now. If her college/car aren't covered, I think it's a valid point to consider putting some in a taxable account for her.
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Old 11-19-2017, 12:32 PM   #13
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Originally Posted by ohyouknow View Post
If you opened a Roth IRA for a 12 year old today (funded with babysitting money) would you leave any portion of it in a money market and wait for market correction before buying index funds or invest it all now?
Since the investments will have around a 50-year duration, I'd put everything in immediately.

Market timing doesn't work. The longer you wait, the longer some of the money remains out of the market. In the long run, the market has always beaten other investments. 50 years is the long run.

Now, there is a different question you should consider first - is a Roth IRA really the proper vehicle for this money? Most 12-year-olds have other things to worry about besides retirement.
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Old 11-19-2017, 01:11 PM   #14
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If you opened a Roth IRA for a 12 year old today (funded with babysitting money) would you leave any portion of it in a money market and wait for market correction before buying index funds or invest it all now?
If the intent is for it to stay invested for 50 years, then I think the Roth is the correct account type. With a 50 year horizon, the evaluation of the market means absolutely nothing at this time. Lump sum it in now.

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Old 11-19-2017, 03:25 PM   #15
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For a 12 year old? Would like more info. Is this their money? Or is this some sort of deal where you will match their earned income from babysitting with a retirement investment you fund in their name?

If the former.... I'd think they have a lot of other things to worry about shorter term, like (possibly) college, downpayment on cars and houses, that sort of thing. If the latter, and your "match" is earmarked for a retirement investment, yeah, go with a Roth, be aggressive and let 'er rip. With a time horizon of up to 80 years, IMO, short term market fluctuations are noise.
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Old 11-19-2017, 03:38 PM   #16
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I wouldn't try to time the market. With corporate tax rates likely to drop significantly in the near future, stocks may stay high for several more years. Can you even invest in an IRA if your only income is babysitting money? Don't you need to file taxes and have an official AGI so you know how much you can invest?
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Old 11-19-2017, 04:13 PM   #17
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Roth IRA money is not totally locked up, after 5 years the contributions can be withdrawn without tax or penalty.
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Old 11-19-2017, 04:29 PM   #18
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Can you even invest in an IRA if your only income is babysitting money? Don't you need to file taxes and have an official AGI so you know how much you can invest?
I'm sure you can invest in an IRA even with only babysitting earnings. The parents would be trustees until the child is 18, I think.

And I suspect you do have to have an SSN and file a tax return to do it, but I am not a lawyer or CPA and here is what I *believe* to be the case. IIRC if there are earnings of more than $400 they must file Schedule SE and pay self employment taxes, but wouldn't owe federal income taxes on such a small amount.

That said there will be an amount of earned income associated with that, and the sitter (regardless of age) would be able to contribute up to that amount with a Roth IRA, which could be funded as a gift from parents or someone else while they keep their own earnings for spending money or other personal savings.

In other words, if a child earned $1,000 in a year for babysitting, they would owe self-employment tax on $1,000. That would be too little to trigger personal federal income tax even as a minor dependent; they would file a tax return but owe no income tax (only self-employment tax). But a parent or client or other interested party could "gift" them up to $1,000 to put into a Roth IRA, but no more than that since the contribution can not exceed earned income.

If the money was paid nudge-nudge-wink-wink under the table, there would be no documented earned income reported to the IRS so no eligibility for an IRA contribution (not to mention tax evasion in the strictest sense).
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Old 11-19-2017, 04:56 PM   #19
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I would be careful giving kids control of the money too early. And 18 is too early in my opinion. I had a CA gift to minors account for my kids that I setup for them to use for college, it was their money, in their SSN, but I was the trustee. I opted for age 25 before they had control. They were definitely NOT ready at 18 to control a relatively large sum of money, just out of high school, thinking about a new car, whatever. But by 25 they were, in fact I turned over control to one of them a year early because they were. But an 18 year old, in my opinion, no way.
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Old 11-19-2017, 10:32 PM   #20
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Another consideration might be if the child wants to "play this game" at all.

One thing I told my kids is that, although having a stash in a US tax incentive based savings plan has you invested in that scheme. I hate to go guns and ammo on you here, but there's always the possibility that the financial system will crater and the guy who spent every dime will be on the same footing as the guy who saved. BUT, and this is important, I also said that I didn't think this was at all likely. Possible, yes, but not likely. But I didn't want to be the guy who never mentioned the possibility.
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