Vanguard IRA for 22 year old

[Stormy Kromer]

Hello all, DD just moved to a new city to continue her education. She's been working through school and her former employer offered a 401k which she has accrued nearly $6,000. She's fully vested and plans on rolling it to an IRA at Vanguard.

My question for the folks here is, what fund(s) would you invest in if you were 22 with a 40 year time period to invest ?

I'm thinking either the 2060 retirement fund or just plain old Vanguard Total Stock Market index.

Thoughts ?

 

[OldShooter]

50-70% VG total market and 50-30% VG total international. Or 100% VTWSX or VT. Keep up regular saving to the IRA, ride the 100% equity horse until at least age 45. Then look carefully at the situation and projected retirement $$ needs, maybe stay with all equities for another ten years.

Have some taxable savings to ride out bumps in life like being between jobs.

 

[samclem]

My question for the folks here is, what fund(s) would you invest in if you were 22 with a 40 year time period to invest ?

I'm thinking either the 2060 retirement fund or just plain old Vanguard Total Stock Market index.

Thoughts ?

Either would be fine for now. The 2060 Target Fund will get her foreign equity exposure, which is nice. The allocation to bonds will be appropriately small (about 10%, total foreign and domestic) for about 20 years more, which is great. If nobody ever touches it again, the 2060 fund can carry her to retirement, and she'd be well ahead of most investors.


Most people don't care about investing, they aren't like the people at this site. They don't need a perfect plan, they just need a good one that they can follow. If told they need to "rebalance," who knows what they might do? If she adds to the Target 2060 fund to the max IRA allowed every year, she'll be well ahead of most people. If she decides to learn a bit AND doesn't get taken by "the sharks", maybe she'll decide to fine tune it. But for now, I'd go with the 2060 Target date Fund.

 

[OldShooter]

... Most people don't care about investing, they aren't like the people at this site. They don't need a perfect plan, they just need a good one that they can follow. If told they need to "rebalance," who knows what they might do? If she adds to the Target 2060 fund to the max IRA allowed every year, she'll be well ahead of most people. If she decides to learn a bit AND doesn't get taken by "the sharks", maybe she'll decide to fine tune it. But for now, I'd go with the 2060 Target date Fund.

I think I like this answer better than mine.

 

[pb4uski]

Hello all, DD just moved to a new city to continue her education. She's been working through school and her former employer offered a 401k which she has accrued nearly $6,000. She's fully vested and plans on rolling it to an IRA at Vanguard.

My question for the folks here is, what fund(s) would you invest in if you were 22 with a 40 year time period to invest ?

I'm thinking either the 2060 retirement fund or just plain old Vanguard Total Stock Market index.

Thoughts ?

My 30 yo DS is in Vanguard Target Retirement 2050 Fund (VFIFX).

Vanguard Total Stock Market Index Fund Investor Shares	54.20%
Vanguard Total International Stock Index Fund Investor Shares	35.90%
Vanguard Total Bond Market II Index Fund Investor Shares**	6.90%
Vanguard Total International Bond Index Fund Investor Shares	3.00%
100.00%

I talked with him when he first started and he wanted to be conservative and chose this over 100% Total Stock, which I was trying to pitch to him.

Another thing that you may want to check into is whether your DD qualifies for the Retirement Savers Credit. DS income is low enough that he qualifies. We do tIRA contributions to reduce his AGI to get the highest rate of 50% of contributions as a tax credit and then Roth contributions to increase the credit to equal his tax... so his net tax is a big, fat zero. He has received back 100% of his federal tax withholding each of the last 3-4 years.

https://www.fool.com/retirement/2017/10/22/the-2018-savers-tax-credit-free-money-to-save-for.aspx

 

[USGrant1962]

I recently advised DS#1 (23 years old) to use Vanguard Target 2065 in his 401(k). I also helped both him and DS#2 (21 years old) open taxable accounts with Vanguard starting them out in a combination of Prime Money Market and VTWSX.

So what samclem and OldShooter said

 

[JDARNELL]

Another thing that you may want to check into is whether your DD qualifies for the Retirement Savers Credit. DS income is low enough that he qualifies. We do tIRA contributions to reduce his AGI to get the highest rate of 50% of contributions as a tax credit and then Roth contributions to increase the credit to equal his tax... so his net tax is a big, fat zero. He has received back 100% of his federal tax withholding each of the last 3-4 years.

https://www.fool.com/retirement/2017/10/22/the-2018-savers-tax-credit-free-money-to-save-for.aspx

Can you explain this a little more? Interesting idea

 

[eroscott]

My mid-20s DS is currently doing these two 50-50 within a ROTH IRA (important for the VGHCX Div,LtCGs).
Vanguard Target Retirement 2060 Fund;Investor (VTTSX)
Vanguard Health Care Fund;Investor (VGHCX)

...

Another thing that you may want to check into is whether your DD qualifies for the Retirement Savers Credit. DS income is low enough that he qualifies. We do tIRA contributions to reduce his AGI to get the highest rate of 50% of contributions as a tax credit and then Roth contributions to increase the credit to equal his tax... so his net tax is a big, fat zero. He has received back 100% of his federal tax withholding each of the last 3-4 years.

https://www.fool.com/retirement/2017/10/22/the-2018-savers-tax-credit-free-money-to-save-for.aspx

Another article explaining this. (I'm wondering why my DS has not seen this in TurboTax this year. Investigating). UPDATE: We had not gone far enough in TurboTax. Attachments shows where the RSC is within TT.

https://www.nerdwallet.com/blog/taxes/can-you-take-the-savers-credit/

 

[pb4uski]

Can you explain this a little more? Interesting idea

Did you read the link?

 

[JDARNELL]

Yes. I don’t have the irs work sheet but it seems like 9925 if someone is claiming them or 23925 single agi. I need to think about the calculation a little more

 

[DrRoy]

+1 Total Market.

 

[rmcelwee]

My advice is probably going to be counter to what other people will say but I have made a lot of money doing this. If you believe that 40 years from now that the S&P will be higher than it is now then you should invest in a fund that does a multiple of the S&P. A simple google search on "double the S&P" or 3x S&P will yield a few mutual funds to look at. The last fund I purchased like this was TQQQ (3x the Nasdaq 100). It goes up 3 times what the QQQ goes up but it also goes down 3X what QQQ goes down so be careful not to look at it every day. If you are in it for the long haul I cannot for the life of me figure out a downside to investing this way. It definitely has higher fees than other funds but the upside is huge. The fund is up 50% since the lows in the market around Christmas. The fund is up around 2200% over the past 9 years. At the market high last year it was up around 4700% (yes, you read that correctly) in that same time period. Again, it is not for the faint of heart.

 

[pb4uski]

Yes. I don’t have the irs work sheet but it seems like 9925 if someone is claiming them or 23925 single agi. I need to think about the calculation a little more

As an example, let's say someone has income of $20,000 for 2018.

They do a $1,000 deductible tIRA contribution to reduce their income to $19,000 which is where they get a credit for 50% of retirement savings contributions. Their taxable income is then $7,000 ($19,000 - $12,000 standard deduction) and the tax on that is $700 (10%) and their tax credit is $500 (50% of $1,000) and their net tax is $200.

If they then make a $400 contribution to a Roth IRA then their income is their tax is still $700, but their tax credit is $700 (50% of $1,400 in total retirement contributions) so their net tax is zero and they get back all their withholding.

 

[eroscott]

As an example, let's say someone has income of $20,000 for 2018.

They do a $1,000 deductible tIRA contribution to reduce their income to $19,000 which is where they get a credit for 50% of retirement savings contributions. Their taxable income is then $7,000 ($19,000 - $12,000 standard deduction) and the tax on that is $700 (10%) and their tax credit is $500 (50% of $1,000) and their net tax is $200.

If they then make a $400 contribution to a Roth IRA then their income is their tax is still $700, but their tax credit is $700 (50% of $1,400 in total retirement contributions) so their net tax is zero and they get back all their withholding.

Great job of breaking that down in a simple way.

What about the alternative. Why not just do $1400 to a ROTH IRA?

$20,000 income; $8000 (20-12SD); $800 taxes; tax credit $700 (14@50%); owe $100 *but* no future taxes on the ROTH IRA withdrawal AND ROTH contributions could be taken out tax-free in an emergency.

$100 in taxes seems like it would be a great trade-off for tax free withdrawals in retirement. Pay a little now vs pay a lot later.

 

[pb4uski]

The reason that you can't do that is because while if your income is $19,000 or less you get a credit for 50% of contributions, if it is $19,001-$20,500 the credit is only 20%... so in the scenario that you described the credit would be $280 and the tax due would be $520.

See the link in previous post for where the break points are.

 

[eroscott]

The reason that you can't do that is because while if your income is $19,000 or less you get a credit for 50% of contributions, if it is $19,001-$20,500 the credit is only 20%... so in the scenario that you described the credit would be $280 and the tax due would be $520.

See the link in previous post for where the break points are.

Doh! Sorry, I missed that subtlety. Looks like some slight increases for 2019.

 

[pb4uski]

You got the idea... use deductible IRA contributions to reduce income to a sweet spot for the credit given the circumstances and the Roth conversions to mazimize the credit to be equal to the tax if possible.

My nephew will be earning more than the $32k in 2019 even after the max deductible contribution, but since he graduated in May 2018 and didn't start work for a couple months after that, he will qualify in 2018.

 

[JDARNELL]

You got the idea... use deductible IRA contributions to reduce income to a sweet spot for the credit given the circumstances and the Roth conversions to mazimize the credit to be equal to the tax if possible.

My nephew will be earning more than the $32k in 2019 even after the max deductible contribution, but since he graduated in May 2018 and didn't start work for a couple months after that, he will qualify in 2018.

I am thinking about the first year when DS gets out of school. I think we can make this work

 

[Stormy Kromer]

Thank you all for the responses and for the information on the Saver's Credit. I'll run this past our tax preparer, I think DD will qualify this year and next.


Back to my original question, I've made a decision. We're going with Vanguard Target 2065. For the simple reason, it's something we can set and forget. DD is a good saver, but not real interested in the mechanics behind picking funds, rebalancing.....and I'm not always going to be here to help her with it. The underlying funds in 2065 are the funds we'd be using on our own anyway. I feel good knowing it will take care of rebalancing in the future and I can tell her "Just leave this alone for the next 40 years" and keep contributing to the max. I would have been way ahead if someone told me that when I was 22. Thanks all for your perspectives on this.

 

[pb4uski]

.... I would have been way ahead if someone told me that when I was 22. ....

If it makes you feel better, these wonderful target based index funds weren't around when you were 22.

 

[HI Bill]

100% VUG (Vanguard Growth Index ETF) or 100% VOO (S&P 500 Index). Eventually, I'd add a little VXUS (Total International Stock Market Index ETF). Target retirement date funds are too conservative, IMHO, with a 20 to 40-year horizon. After all, she might want to retire early some day!

I was in 100% equities until 1.5 years prior to retirement. I watched Vanguard's Wellington and Windsor flail along, missing out on overall market returns.

This recommendation is made as long as the OP's daughter won't panic in a downturn.