Retirement investment advice for early-mid 20 year olds

[ponyboy]

If OP thinks his daughter is going to retire early, how couldn't she have a lower tax rate for the years until she pulls SS, pension, etc? She would have almost no income except dividends, cap gains and interest.

She could have 20 years to do roth conversions at a low tax rate. This is what we plan on doing.

OP...there are calculators out there that compare Tira vs Rira. I've never run a scenario where we retire early and it would have been beneficial to have a Roth 401k.

Someone at bogle heads made a good point once...max your 401k. With all the pre tax savings, you can then max your Roth IRA ($7k.)

Either way, it sounds like she's already off to a great start and the fact that you're helping her early on will be massive for her. Whether she does a combo of different accounts, she should be in good shape.

 

[FedRetired50]

If OP thinks his daughter is going to retire early, how couldn't she have a lower tax rate for the years until she pulls SS, pension, etc? She would have almost no income except dividends, cap gains and interest.

She could have 20 years to do roth conversions at a low tax rate. This is what we plan on doing.

I only used traditional retirement savings and just between those distributions and my pension, I'm in the 22% tax bracket to cover living expenses. Add in capital gains for travel and I'm back to the 24% bracket where I was before I retired. I have 9 years to go before SS. She'll have a pension, too. So it is possible.

See the chart in my prior reply (from late last night). With the removal of RMD from Roth 401k (as of last year) it looks to me like there is no advantage to using Roth IRA when you have Roth 401k available to you.

She may not be able to do conversions, except maybe to fill up her current bracket.

 

[NomDeER]

I only used traditional retirement savings and just between those distributions and my pension, I'm in the 22% tax bracket to cover living expenses. Add in capital gains for travel and I'm back to the 24% bracket where I was before I retired. I have 9 years to go before SS. She'll have a pension, too. So it is possible.

See the chart in my prior reply (from late last night). With the removal of RMD from Roth 401k (as of last year) it looks to me like there is no advantage to using Roth IRA when you have Roth 401k available to you.

She may not be able to do conversions, except maybe to fill up her current bracket.

Yep, I'm not on Social Security yet and I'm already dealing with the 22%/15%CG rates. It's going to be an even bigger issue once I start getting Social Security and then when I have RMDs. And I was not making a huge salary. IMO, when you consider taxes, it often makes sense to take advantage of Roth accounts when you are younger.

I think the Roth IRA versus Roth 401(k) debate depends on specifics of a particular situation. Are the fees the same in each? That adds up and compounds over time. Are investment options and withdrawal options the same? Part of my TSP is Roth. I didn't mind the limited number of fund types in the TSP, but I was not happy that I did not have the option of investing in particuar funds in the Roth and investing in other funds in the traditional TSP; each fund was divided proportionately between the traditional and Roth. That can be a drawback depending on your investment/tax strategy.

Also, I believe it is easier to withdraw contributions (and contributions only so no taxes and penalties) before age 59.5 from a Roth IRA versus a Roth 401(k). At least, that used to be the case. I don't know if it's changed. I would look at the fine print about withdrawals on the Roth 401(k) because I think they can be more unwieldy in some situations.

 

[FedRetired50]

Are the fees the same in each?

She has access to low-cost index funds, happily.

I didn't mind the limited number of fund types in the TSP, but I was not happy that I did not have the option of investing in particuar funds in the Roth and investing in other funds in the traditional TSP; each fund was divided proportionately between the traditional and Roth. That can be a drawback depending on your investment/tax strategy.

Agree that is a downside to the TSP, but she's in the private sector.

Also, I believe it is easier to withdraw contributions (and contributions only so no taxes and penalties) before age 59.5 from a Roth IRA versus a Roth 401(k). At least, that used to be the case. I don't know if it's changed. I would look at the fine print about withdrawals on the Roth 401(k) because I think they can be more unwieldy in some situations.

You may be right, I need to look into this.

 

[Diogenes]

Who they marry is the biggest factor of all.

Exactly!

Save aggressively and invest wisely. True, but that's like enjoining somebody to eat with using their hands, and walk using their legs. Yes, of course; what else would one do? Bromides only take us so far!

But figuring out, at least approximately, who one genuinely is. How to relate to others. How to judge people (accurately, and not judgmentally). How to find and cultivate an identity outside of work. How to build a sense of self, and comity with one's partner (after, you know, finding a partner...). These things sound simple, and superficially they are. But the details are incredibly, inscrutably complex. Get them wrong, and no millions or tens of millions or hundreds of millions will help. Get them right, and a tight budget - resulting from failing to maximize one's 401K - is only a nugatory hardship.

 

[FedRetired50]

... and no millions or tens of millions or hundreds of millions will help.

Dunno, if I hit 8 or 9 figures that can fix a few problems.

 

[Stormy Kromer]

I have been investing since I was 15. Now I am 59.5

I am most happy to have money in my Roth's

Next brokerage accounts (wish more were ETF's)

next tax deferred IRA'a. Going to pay taxes with Required withdrawals or leave the heirs with a tax bomb.

 

[SnowballCamper]

"tax bracket is lower ... Roth". You mean the opposite, right? You only get a tax deduction for standard 401k.

I'm steering away from filling up either the Roth or traditional even though it isn't the perfect tax scenario. She can fill that up later as her income rises, but getting some post-tax investing started - including savings for a car without financing, or house down-payment - needs to start, too.

You are getting where I'm coming from, I want her to have all options on the table if she retires early, which she's very likely to do (she's 22 and already has $21k in her 401k, plus another $10k outside of the 401k). A post-tax investment account will let her have full options. The Roth would give other options like withdrawing the original contributions at any time, then the rest tax-free. Etc.

No, I mean that now that she is young her tax bracket is lower than it will be in the future (because she will get raises and promotions which will move her into a higher tax bracket). So I think the prudent thing is to save in a Roth IRA after you get matching funds in the 401k. The alternative is to fund the Roth IRA later in life when the tax bracket is higher...or not use the Roth at all, or have to do the gymnastics of the backdoor Roth.

Edit to add: I guess there is the possibility that she retires early, and can limit her income before RMDs, but OP mentioned she has a pension available, so that will at leas be limited.