Just started saving, need advice with IRA.

[suchda]

My daughter started her first job in early September. She will have around $6500 as gross, net after taxes around $5000. How much max she can put into IRA/Roth IRA and what will be better for her - Traditional vs Roth ?
Thank you in advance for your great suggestions.

 

[Aerides]

Assuming your daughter is just starting out, in order, I'd do the following, in order:

1. Put aside at least 3 months of living expenses in an emergency fund
2. Start contributing to her company 401k to at least obtain the Match (assuming there is one, if not, start with 3)
3. Increase emergency fund to 6 months
4. Increase 401k/Roth savings towards max
5. Increase emergency fund to 12 months

Then look into after tax savings, etc., after all that. Also have a budget for some fun and things. If she's very young, it will take her a long time just to get to #3 and that's ok.

In the past I would have said stop at 6 months emer fund, and that might still be a good idea, but given this past year, 12 months would be what I'd have done if I were still working.

 

[pb4uski]

Contribution limit for 2020 is $6,000. Roth would be better at this point and for a while until her earnings grow and she is in a higher tax bracket.

There's nothing wrong with taxable savings either... at her income level equity ETF income (qualified dividends) and LTCG would be tax free... up to $40k of taxable income in 2020. In fact at this point it might be better in that it will be more accessible even though any Roth contributions can be withdrawn at any time.

From what you wrote it sounds like she will not pay any tax as her itemized deduction will exceed her gross earnings.

Next year, she should consider the Retirement Savers Tax Credit. https://www.investopedia.com/articles/retirement/04/031704.asp

 

[suchda]

As she doesn't need to think about money at this time, I wanted her to put all her income into a IRA vs Roth IRA account. It will give her some kind of understanding of retirement savings, future retirement planning. I think with her very low earnings, she can put $6000 into a Roth account. As you mentioned, there will be no penalty if she needs to withdraw that money in the future. Thanks.

 

[Animorph]

I like the Roth account. Certainly not a traditional IRA since she doesn't need the tax deduction or a future taxable withdrawal.

Contributions can be withdrawn from the Roth at any time (though I've never done that). I think it makes a great parking spot for emergency funds. Even if you end up in cash or bonds for a while to ensure stability, you could shift some to equities in the future.

A 401k contribution to get the company match is always good, if it applies.

A taxable account would be fine for now, but may start to incur taxes in the near future.

I think the only disadvantage of the Roth is that the gains aren't freely accessible for emergency use. And the slight hassle of withdrawing from a Roth might keep the emergency fund more available for actual emergencies.

 

[OldShooter]

Two worthwhile things for her to read:

(free) "If You Can" by William Bernstein https://www.etf.com/docs/IfYouCan.pdf (16 page download aimed directly at twenty-somethings)

(worth the money) "The Coffee House Investor" by Bill Schultheis https://www.coffeehouseinvestor.com/