18 year old Army recruit Roth or Traditional?

[KenZ71]

So my 18 year old nephew is asking my advice about his TSP elections and contributions.

I'm thinking the young lad should go with max contribution to Roth. Yes he will not get a tax deduction but he shouldn't have a tax liability as his income is less than peanuts. Right?

He says what about emergency fund. I say any emergency while in army would be Uncle Sam's issue, not his. Am I right here too?

 

[nash031]

Roth TSP, max it out.

He doesn't really need an emergency fund until he knows when he's getting out or going to another job. Any medical issues will be picked up by the army. Employment is pretty much guaranteed as long as he plays by the rules and does his job. I've been active for 19 years, never had an emergency fund. Never really saw a need.

 

[Walt34]

He says what about emergency fund. I say any emergency while in army would be Uncle Sam's issue, not his. Am I right here too?

For the most part you're right. Assuming he's living on base or renting somewhere, any roof leaks are the Army's or landlord's problem. If he buys a car he'd be wise to keep some money set aside in case the transmission falls out I suppose but otherwise he won't need much. Any medical issues the Army deals with.

I can't think of any other reason he'd need an emergency fund.

 

[aaronc879]

Yes, Roth should be his best bet at his age and income. A single person can make around $51K/yr before going from the 12-22% tax bracket. Until he goes above that mark he should invest in a ROTH IRA and ROTH TSP.

 

[Red Badger]

For the most part you're right. Assuming he's living on base or renting somewhere, any roof leaks are the Army's or landlord's problem. If he buys a car he'd be wise to keep some money set aside in case the transmission falls out I suppose but otherwise he won't need much. Any medical issues the Army deals with.

I can't think of any other reason he'd need an emergency fund.

Another vet here. He doesn't need 6-12 months emergency fund, but at least a 3 month stash would be prudent. Personal example; I chose to live off base for good reason (single E-6). It was fine from a policy standpoint and better for me. As a single soldier, I wanted nothing to do with co-ed barracks as certain "fraternization" would be career ending.

Anyhoo, my apartment complex of 24 units burned to the ground one night. I lacked renter's insurance, so having a few grand in stash kept me from some difficult decisions.

The one fall back that I thought would lend a hand was AER (Army Emergency Relief). Nope. 'Nuff said. Their short sided rule/policy ultimately cost them a hell of a lot more than I was seeking. I went from a solid payroll deduction donor to "not another dime." And my career had another 20 + year run.

Anyway, stuff happens. Have a stash of some comfort level.

 

[Out of Steam]

My college-age daughter got frustrated with low bank interest on her savings last year and we worked together to open a Roth IRA with some money she could spare. She paid zero federal tax rate, so that seemed like the right answer.

 

[KenZ71]

Thanks all. I'm glad my nephew is asking the questions! I'm hoping he continues the mindset

 

[ransil]

Normal 18 year old in the military will buy a camero /mustang/ charger with 22% interest. Good for him investing early.

 

[ncbill]

Roth, it's what my kid does since they enrolled at their military academy.

 

[Offgrid Organic Farmer]

If he were a part of the 17% who enlist and stay for 20 years. He would be able to get a pension, at 38 years old.

I served for 20-years on Active Duty myself. I got out after 6 years and used my GI-Bill to attend college for 4 years. Then I went back to Active Duty and I got the pension. I retired at 42 years old.

I have been retired for 17 years. If I had invested in a 401[k], I would today still not be allowed to access any of that investment without paying a heavy penalty. Because I am not yet old enough. Even though I have been retired for 17 years.

I agree that he should invest. A solid investment plan would help him, if he were among those of us to manage to serve for 20 years. But it needs to be a portfolio that he can access when he retires.

The vast majority of military retirees, can not live on their pensions. The reason for this is that they simply do not have enough of a portfolio built-up, to complement their pension. So with the military pension flowing they must seek a second career.

I had a sizeable portfolio when I retired from Active Duty. My advice is for him to do the same.

 

[nash031]

The vast majority of military retirees, can not live on their pensions. The reason for this is that they simply do not have enough of a portfolio built-up, to complement their pension. So with the military pension flowing they must seek a second career.

I had a sizeable portfolio when I retired from Active Duty. My advice is for him to do the same.

You make good points, however having sizeable investments is half the battle. Limiting expenses is the other half. I will retire in about a year with a seven-figure investment portfolio in addition to pension compensation, and yet that will likely not be enough where I will fully retire myself. We are staying in San Diego; we have two young children. While I probably could retire fully, I'm choosing not to... for one thing, I have more I want to do in the "real world"; for another, I want better insurance on my family's future; and finally, wife and I have some dreams we want to chase. I'll work for those.

All that said, relative to my friends who have retired before me, we are an order of magnitude or more ahead of them in terms of investments. You're absolutely right that most active duty retirees think their pensions are going to cover a lot more than they really will, particularly in HCOL areas like Hawaii and San Diego, where a lot of us dream of staying. You opted to go to Maine and have a much lower COL than many will want/have. To each, their own!

I suspect the change to the blended retirement system will see a lot of folks get out with more investments, but their pensions will be trimmed by 20% relative to what you received at 20 years.

 

[pb4uski]

So my 18 year old nephew is asking my advice about his TSP elections and contributions.

I'm thinking the young lad should go with max contribution to Roth. Yes he will not get a tax deduction but he shouldn't have a tax liability as his income is less than peanuts. Right?

He says what about emergency fund. I say any emergency while in army would be Uncle Sam's issue, not his. Am I right here too?

Right, go with the Roth... tax-free growth far exceeds negligible tax benefit.

If he has income coming in and some credit cards then no real need for emergency fund but it wouldn't hurt to have a couple grand in an online savings account.

 

[MrsHaloFIRE]

Everyone needs an emergency fund. Youngsters living inthe barracks still have unexpected car repairs, need a new tire, need to buy a flight home for a family emergency, fall in love and want to get married, want to move out of the barracks and need first/ last rent and utility deposits. Also good for him to save for a transition fund when he gets out. Could get medically chaptered. Could be planning on a full career and hate it after 1 contract. There's a lot of that.

 

[Animorph]

With a Roth you can withdraw your contribution amounts (not any growth) without tax or penalty. That should work fine as a true emergency account, but not something I'd normally consider. It also makes stretching a bit to make contributions feel a bit less risky.

 

[deserat]

Send him to Doug Nordman's blog: lots of advice there for new military personnel and the BRS, Roths, etc. https://the-military-guide.com

 

[Jollyquick]

Kenz71,

Easy answer, 100% ROTH! Max out both TSP and IRA. Once he’s making & investing enough money to be concerned about what to do with the extra cash he’ll likely no longer be eligible for a ROTH.

If ROTH and TSP were both around when I joined I’d be a significantly wealthier individual. Almost criminal how fast you can accumulate wealth in the US military now. Gone are the days of maxing out your IRA and then having to figure out what to do with anything extra. Also gone are the days of “military friendly” investment advisers easily taking advantage of naive service members. Sadly it still happens, but the internet generations are much more financially savvy and have more tools at their disposal than previous generations: ETFs, low load index funds, ROTH, TSPs, 401Ks, REITs...Oh My!

Factor in low to zero education debt, medical, dental, vested retirement pension and subsidized housing and it becomes a real question as to why more young people don’t go the military route for at least their college degree years.

JQ

 

[Jollyquick]

Send him to Doug Nordman's blog: lots of advice there for new military personnel and the BRS, Roths, etc. https://the-military-guide.com

+1 for Nords! Can’t recommend him enough, even if you don’t agree with everything he may say, his articles and commentary are well written and insightful. A great place to start when seriously contemplating your finances as a military service member.

 

[aaronc879]

Easy answer, 100% ROTH! Max out both TSP and IRA. Once he’s making & investing enough money to be concerned about what to do with the extra cash he’ll likely no longer be eligible for a ROTH.

He is enlisting, he's not going to be an officer. He won't be maxing out his TSP with a <$30K salary. He wil always be eligible for a ROTH IRA on an enlisted soldier's salary. He should contribute what he can to a ROTH IRA then in a few years when he makes a somewhat reasonable salary then he can contribute to a TSP as well but will never likely max it out.

 

[griffithee]

You make good points, however having sizeable investments is half the battle. Limiting expenses is the other half. I will retire in about a year with a seven-figure investment portfolio in addition to pension compensation, and yet that will likely not be enough where I will fully retire myself. We are staying in San Diego; we have two young children. While I probably could retire fully, I'm choosing not to... for one thing, I have more I want to do in the "real world"; for another, I want better insurance on my family's future; and finally, wife and I have some dreams we want to chase. I'll work for those.

All that said, relative to my friends who have retired before me, we are an order of magnitude or more ahead of them in terms of investments. You're absolutely right that most active duty retirees think their pensions are going to cover a lot more than they really will, particularly in HCOL areas like Hawaii and San Diego, where a lot of us dream of staying. You opted to go to Maine and have a much lower COL than many will want/have. To each, their own!

I suspect the change to the blended retirement system will see a lot of folks get out with more investments, but their pensions will be trimmed by 20% relative to what you received at 20 years.

We left Hawaii after we retired because of the HCOL. Miss the climate and the views but not the prices or traffic. Moved to Houston area and are successfully living off our pensions and VA comps. Planning to move to Tampa area in two years as my parents are up in years and mobility is proving to be there challenge. I want to have our six year old get some more time with Nanny and Papa before they pass. I have not been employed for five years and wife for three years. We are both stay home parents (who send their kid to school. Hoping to never have to work for "the man" again. We liquidated our TSP last year to pay off the house. Still saving ~50% monthly income so hoping that grows to a nice inheritance for our son or new Masarati. I retired at 44 and wife retired at 41. We are 49 and 44 years old now. Life is truly good and we are blessed.

 

[MarieIG]

Roth TSP hands down. Think of all that compounding. He can build up his emergency fund little by little and should aim on keeping expenses low.

 

[Nords]

Send him to Doug Nordman's blog: lots of advice there for new military personnel and the BRS, Roths, etc. https://the-military-guide.com

+1 for Nords! Can’t recommend him enough, even if you don’t agree with everything he may say, his articles and commentary are well written and insightful. A great place to start when seriously contemplating your finances as a military service member.

Thanks, everyone!

If I had invested in a 401[k], I would today still not be allowed to access any of that investment without paying a heavy penalty. Because I am not yet old enough.

Farmer, that's a very common misconception and it's totally wrong.

Here's the list of ways to tap a Thrift Savings Plan and an IRA before age 59.5, without penalty and possibly without taxes:
http://the-military-guide.com/early-withdrawals-from-your-tsp-and-ira-after-the-military/

 

[Jollyquick]

He is enlisting, he's not going to be an officer. He won't be maxing out his TSP with a <$30K salary. He wil always be eligible for a ROTH IRA on an enlisted soldier's salary. He should contribute what he can to a ROTH IRA then in a few years when he makes a somewhat reasonable salary then he can contribute to a TSP as well but will never likely max it out.

I enlisted back in 1985 and managed to max out my TSP and IRAs for me and my DW the last 10 years of my career. Don’t underestimate the tenacity of smart service members. Your young man could become senior enlisted leadership, go commissioned, or transfer to civil service. Any of which are financially rewarding enough to become financially independent after 20-30 years of service. Especially considering the investing friendly opportunities and benefits provided to his generation of service members.


JQ

 

[exnavynuke]

I just want to second the "have an emergency fund" sentiment. The guaranteed paycheck and the medical coverage is great, but it doesn't pay your auto-insurance deductible or get you by while you're waiting for a check from the rental insurance company when your stuff has all burned to the ground.

 

[Offgrid Organic Farmer]

... Farmer, that's a very common misconception and it's totally wrong.

Here's the list of ways to tap a Thrift Savings Plan and an IRA before age 59.5, without penalty and possibly without taxes:
http://the-military-guide.com/early-withdrawals-from-your-tsp-and-ira-after-the-military/

That is a minefield of clickbait.

"here are the early withdrawal options for a Roth IRA that’s at least five tax years old:

You can withdraw up to $10K for your purchase of your first home.
A Qualified Reservist Distribution during at least 179 days of active duty.
A monthly payment based on your life expectancy.
The principal of a conversion to a Roth IRA (after five tax years).
Any of the other unusual situations starting on page 30 of the IRS IRA Pub 590-B."

I am not sure if any of these would really be helpful.

 

[REWahoo]

Farmer, that's a very common misconception and it's totally wrong.

Here's the list of ways to tap a Thrift Savings Plan and an IRA before age 59.5, without penalty and possibly without taxes:
http://the-military-guide.com/early-withdrawals-from-your-tsp-and-ira-after-the-military/

Nice try Doug, but it's been obvious for some time you're not going to get through. Maybe try an ELF transmission.