IRA and Roth IRA for dummies

[saraha]

My oldest is preparing to fledge into the adult world with his first full time job and apartment. He is also on the spectrum. We want to help him to invest for a future time when we won't be there. He has a state job so is paying into their retirement plan, but we would also like to set up some kind of account he can pay into just in case and that will help him to remain quasi-independant when our time is up and not put the responsibility on his sisters.

If anyone is interested, I need the kind of explanation you would give to a five year old about the best options for this. Dh and I have no experience with investing or anything other than having a CD back in the 90s, haha.  I know I can research online, but the Hive is seriously the best place for been there, done that.

Thanks in advance.

[Katy]

First check and see if there is such a thing as an ABLE account in your state and if he is eligible (age, etc).

[City Mouse]

I can’t give much explanation, when my DD wanted to set up her own IRA, she went to her current bank and just asked them what to do.

[Toocrazy!!]

Investing is complicated and very individual, so it’s hard to give advice for particular situations. But I’ll just start you thinking. 
It sounds like the state plan is a retirement plan, such that he couldn’t access the money until he’s older- maybe 59 1/2. An IRA would be similar to that, so might not offer much different. 
A Roth IRA is a little different in that since you don’t get any tax relief when you invest the money, you can draw your investments back out before 59 1/2 without penalty. So say he’s invested $20,000 that grew to $50,000, you do have access to that $20,000 before retirement age. So, a little more flexibility there. Also, these do grow tax free, so they offer a tax advantage on regular investor accounts. 
First though, he should make sure he has regular liquid accessible savings for emergency purchases, layoffs, job loss, etc. 
 

[Lilaclady]

Between IRA and Roth, I prefer the Roth. With Roth, you pay the tax now and everything you invest is tax free when he is taking the money out. Most people earn more as they grow older so their tax bracket may increase but having the money growing tax free will usually generate more ar retirement especially for people starting in their teens or twenties. With the traditional IRA, you don’t pay taxes now and pay the taxes at retirement. Both have a limit that you can put in them per year based on age. 

[cjzimmer1]

I knew/know next to nothing about investing but I picked up a couple of books to attempt to start building my knowledge.  I found this one to be a pretty good starter because I didn't feel like it was assuming I already knew something

The Simple Path to Wealth: Your road map to financial independence and a rich, free life: Collins, J L, Mustache, Mr. Money: 9781533667922: Amazon.com: Books

There is also this board that is good for reading, learning and asking questions.  Many of the people there are light years ahead of me on their financial path so it can be a bit daunting to post when you have a beginner question but they have been very helpful in helping me get started

Bogleheads.org - Index page

 

For my kids who are just starting out this path, we are having them use Roth because their incomes are not that high so there wouldn't be much tax savings at this point using regular IRA (of course if there is company matching that is a different story).

Edited April 12, 2021 by cjzimmer1

[jrichstad]

For young, lower earners a Roth is definitely a good choice. Most people will want a hands-off index fund, probably target-age, so it invests aggressively at first and then moves gradually more cautious.  Vanguard is consistently highly rated. There are also now newer options like Betterment and Wealthfront. My IRA is with Betterment.

Liquid savings/ emergency funds are crucial, but getting an early start on compound interest is so important too. I wish I could go back and lecture my 20-yr-old self. Not that she'd listen 😂

[Bootsie]

The general difference in an IRA and a Roth IRA is:

• The money that you place in an IRA is not taxed in the year you put the money in the IRA.  So, if you have $3000 of income and put $3000 in the IRA this year, you do not pay taxes on that income.  You will pay taxes on all of the money (the $3000 plus all gains) when you withdraw the money.
• You do pay taxes on the income that you place in a ROTH IRA.  There is no immediae tax benefit.  None of the gains that you earn on the money is taxed; so that future invesstment income is never taxed.

Both are really meant as savings for retirement.  Each has rules associated with how much can be placed in the account (depends on income, tax filing status, whether you have retirement plan).  It is easier to remove money before retirement from a Roth IRA than an IRA.

Both IRAs and Roth IRAs are types of accounts with special tax treatment.  They themselves are not particular types of investments.  You could have a certificate of deposit, or stock, or bonds, or mutual funds in the account--those would be the investments.

 

[saraha]

20 minutes ago, Bootsie said:

Both IRAs and Roth IRAs are types of accounts with special tax treatment.  They themselves are not particular types of investments.  You could have a certificate of deposit, or stock, or bonds, or mutual funds in the account--those would be the investments.

 

Thank you, I did not know this

[saraha]

He has about $8,000 in savings, his income will cover his expenses with extra, so I thought investing the extra would be good. He is a member of the Ohio public employees retirement system, which is a pension program. Is there a better way for a quasi independent adult to invest?

Edited April 13, 2021 by saraha

[Katy]

1 hour ago, saraha said:

He has about $8,000 in savings, his income will cover his expenses with extra, so I thought investing the extra would be good. He is a member of the Ohio public employees retirement system, which is a pension program. Is there a better way for a quasi independent adult to invest?

So an ABLE account, if he’s eligible, can pay for retirement, education, and medical expenses (including hospital parking and group home situations for adults) in most states. You put the money in pre-tax, and as long as you use it for those expenses the money is never taxed. That’s ideal if you’re not sure he’s capable of ever being independent. And other people (besides him) can invest in it on his behalf. The question is if your state has it and if he’s eligible due to age.

[Ottakee]

1 hour ago, saraha said:

He has about $8,000 in savings, his income will cover his expenses with extra, so I thought investing the extra would be good. He is a member of the Ohio public employees retirement system, which is a pension program. Is there a better way for a quasi independent adult to invest?

The book, the Simple Path to Wealth is very good, as mentioned above.

I would have him invest what he can that is matched, etc through his employer and then do a ROTH IRA on his own.  One of the simplest things to do, would be a Vanguard Target date retirement fund.....say 2065 or so.  The fees are super low, it has solid returns, and as he gets older it automatically adjusts to become more conservative.

I would ask no matter where you invest about the fees.   Some are a % of your investments, some have fees per transaction, some charge both.   The differences in fee % can be huge and make a big difference over time.

[Bootsie]

1 hour ago, saraha said:

He has about $8,000 in savings, his income will cover his expenses with extra, so I thought investing the extra would be good. He is a member of the Ohio public employees retirement system, which is a pension program. Is there a better way for a quasi independent adult to invest?

Are you concerned about his having money saved/invested for retirement?  Or, are you wanting him to have money saved as an emergency fund?  

[Wildcat]

14 hours ago, cjzimmer1 said:

I knew/know next to nothing about investing but I picked up a couple of books to attempt to start building my knowledge.  I found this one to be a pretty good starter because I didn't feel like it was assuming I already knew something

The Simple Path to Wealth: Your road map to financial independence and a rich, free life: Collins, J L, Mustache, Mr. Money: 9781533667922: Amazon.com: Books

There is also this board that is good for reading, learning and asking questions.  Many of the people there are light years ahead of me on their financial path so it can be a bit daunting to post when you have a beginner question but they have been very helpful in helping me get started

Bogleheads.org - Index page

 

For my kids who are just starting out this path, we are having them use Roth because their incomes are not that high so there wouldn't be much tax savings at this point using regular IRA (of course if there is company matching that is a different story).

Bogleheads is a wonderful site to learn about investing. It's named in honor of John Bogle who started Vanguard and made it easy for the average person to invest without a Financial Advisor, and in smaller amounts than a Financial Advisor usually requires.

14 hours ago, jrichstad said:

For young, lower earners a Roth is definitely a good choice. Most people will want a hands-off index fund, probably target-age, so it invests aggressively at first and then moves gradually more cautious.  Vanguard is consistently highly rated. There are also now newer options like Betterment and Wealthfront. My IRA is with Betterment.

Liquid savings/ emergency funds are crucial, but getting an early start on compound interest is so important too. I wish I could go back and lecture my 20-yr-old self. Not that she'd listen 😂

This is pretty much what we've advised our young adults. I can't help with the issue of being on the spectrum and Able accounts, so my post is just a general advice thing.

I advise Roth for both 401ks (any match automatically goes into Traditional by law),  and Roth for any extra monies.  When one's income won't allow for a full contribution of both, I advise to contribute in the 401k to the company's match, then to a personal Roth IRA, then any extra retirement savings back into the Roth 401k, up to the IRS yearly limit.

I find Roth is superior to Traditional even in higher incomes if deductions are few. For instance, a single, childless person who rents or a married, childless couple who rents will have no deductions over the standard, so contributing to a Traditional IRA won't help manage their income to allow for extra deduction thresholds, so the Roth IRA is superior in those instances.

As others have mentioned, it's very simple to set up an IRA.

Vanguard is very user-friendly and is perfect for those just getting started.

You would go to their site, choose to open an IRA (or a Roth IRA), fill out the account information, and when they ask for your investment choice, you just choose a fund or ETF. A target-date is a good way to 'set it and forget it' since it rebalances based on one's age. What that means is that the younger a person is, the more stock the fund holds and the fund reduces the stock and adds to the bonds portion so an older person is in less-volatile investments.

When his income allows for extra investing outside of retirement, I'd suggest Vanguard's Index 500 fund. It simply mirrors the stock market and has done well over the decades. It's a great fund for those who aren't comfortable with investing. Think of that as what one would do if they want to move into investing past CDs. Warren Buffet has advised his wife to just use the Index 500 funds after he passes since she doesn't want to mess with investing.

Another thing to think about, is alternating years with IRA and 'regular' investing, if he can't max out his 401k and IRA and extra savings. That will allow him to have money he can access that's outside of the retirement savings, whether it's for a car, house, or any other reason. I don't recommend tapping retirement savings unless one's house is in foreclosure. In most states, retirement savings are safe from bankruptcy, so I wouldn't advise tapping those even in that instance.

Oh, it's very smart to have him invest on the side and not just reply on the sate pension fund. I would assume it's not there at all and invest as if I have to do it all on my own. That way, if everything works out with the pension, there will be more than enough money set aside. I've heard reports of states having a really hard time with their pension funds, so I'd be nervous about relying on that, alone.

On one of the other forums I visit someone there teaches adults about investing. He has a list of books that he recommends, so I'll see if I can find out what they are.

 

[Storygirl]

https://www.stableaccount.com/

Here is a link to Ohio's STABLE account information. We went to a seminar about this a couple of years ago. A big benefit of the STABLE account is that the individual can have savings that are not counted against them, if they go on Social Security disability. Because if the individual's regular bank account balances go over a certain amount (not high -- I think it may be $2000, but you'd have to look it up), SSI benefits diminish. The STABLE account allows the individual to save money without it being counted against them for SSI or Medicaid benefits.

I think that anyone with a autism diagnosis would be eligible for a STABLE account, as long as they are diagnosed before a certain age (I am going by what I remember from this seminar, but you could look this up). You can arrange estate planning to include the STABLE account and do things like have inheritance left in a trust, which flows through the STABLE, or have the rent or mortgage payments flow through the STABLE account, etc. This is a way to make sure that the adult child is set up for the future, without worry about having other adult children have to care for the sibling later on.

It sounds like your son is doing well with employment at this time, and perhaps he will remain independent financially and have no need of a STABLE account. But there is not really a down side to having one, and they are easy to set up. One of the people at the seminar that I attended works for the Ohio STABLE account, and he was super approachable and eager to help people and encouraged people to just call and ask any and all questions.

You should be aware that jobs that use OPERS for pension do NOT contribute funds to social security. So at retirement, the person may not qualify for social security retirement benefits (depending upon whether they qualify based on something other than the OPERS-connected job, for example, through spousal benefits or having another job that did contribute to SS).

I am 100% not an expert on this stuff, but I did have a job with pension funding through OPERS, and so did my mom and MIL, so I have a little experience. The OPERS system can provide a reliable retirement fund, if the individual plans to spend most or all of their career in that job (for example, MIL and my mom retired from teaching careers). And we set up a STABLE account for our son, recently.

But it's really good, in my opinion, to diversify and not expect all retirement to be funded from one source, so I think having an IRA or setting up a STABLE account would be good things to consider. When we set up a ROTH IRA for DD19, we just went to our credit union, and they set it all up for her, easily. If your son is living on his own, he may want to designate some of his savings as an emergency fund or for working toward other goals (buying a car, saving for a condo, etc.), rather than putting it ALL in an IRA. (Actually, I think the limit for contributions may be $6,000.)

Edited April 13, 2021 by Storygirl

[Ottakee]

One caution with the ABLE accounts is that when the individual passes away, the money is given back to the state to repay any medicaid and disability benefits the person received.   So, they are good funds but if a person dies with $100,000 in there, it might all go to the state and none to any relatives, etc.

[Wildcat]

I'm back with the book titles I mentioned above.

I have not read any of them, but I would not hesitate to recommend them to a loved one. Also, the person who teaches the adult classes & recs these books really knows their stuff, so that's good enough for me. I have seen The Coffee House Investor recommended by several people on three or four different, unrelated forums.

These are required reading:

• "If You Can" by William Bernstein https://www.etf.com/docs/IfYouCan.pdf (free 16 page download) This one is really aimed at younger people but it's an easy read, it has reading recommendations, and it will give you a taste of how easy this really is.

• "The Coffee House Investor" by Bill Schultheis https://www.coffeehouseinvestor.com/ Bill is about life balance. Its an easy and very worthwhile read.

These are a 'pick one or two that look good to you' list of further reading suggestions:

• "The Bogleheads Guide to Investing" by Taylor Larimore et al https://www.amazon.com/Bogleheads-Gu.../dp/0470067365

• "A Random Walk Down Wall Street" by Burton Malkiel https://www.amazon.com/Random-Walk-D.../dp/0393330338

• "Winning the Loser's Game" by Charles Ellis https://www.amazon.com/Winning-Loser.../dp/0071813659

• "The Investor's Manifesto" by William Bernstein https://www.amazon.com/Investors-Manifesto-Prosperity-Armageddon-Everything/dp/B002U3CBY8

[saraha]

12 hours ago, Bootsie said:

Are you concerned about his having money saved/invested for retirement?  Or, are you wanting him to have money saved as an emergency fund?  

I want to save for things if we are gone like transportation costs (he will probably never drive), housekeeper maybe, any medical stuff not covered by his insurance, whatever so he will not have to be dependent on his sisters. He wants to travel, etc, but will need companions, so being able to pay their way (even if it is a sister etc) will enable that to happen since not many people can afford to travel abroad. Know what I mean? I just want him to be able to get his needs taken care of with the least amount of responsibility on his sisters. He has a great relationship with his sisters and I don't want him to ever feel like he is a burden on them, or for their relationship to change because they somehow feel responsible.

 

You all have been so helpful! Thank you so much for all of your help!

 

He is smart and so far held his part time job at the library with ease, although he definitely had a co worker that took him under her wing and walked him through anything he was unsure of. He was employed at the Dairy Queen before that and it was a disaster. Through a lot of blood sweat and tears he got an associates so he could move up the library chain and will start his first full time job next month and move into an apartment so he will not need us to drive him. He did two interviews for the job, so I think the HR person and the branch manager might have an idea of some of his quirks, so it wont come as a complete surprise.  We don't have the money to set him up, but he is doing great right now and I want to capitalize on that.

[saraha]

I am overwhelmed with how much work you all have put into this for me! I want to better for him than my mother did for my brother and had no idea where to start. I will get to spend the day going through all of your links, Thanks!!!

[Katy]

One other thing to be aware of- there are no-fee index funds that are designed to exactly follow the market. That can save a lot of money over the long term. 

[Pawz4me]

Here's a basic, easy-to-read article that might be helpful.

In addition to taking advantage of his 401k through his employer, we had DS22 start a Roth with Vanguard (targeted fund) when he started working last year.

[Bootsie]

One thing to consider is how easy it is going to be for him to access the money in the account at any point in time that he chooses.  Do you think that he will be in a position to make decisions with this money?  When to withdraw and use it?  How to spend it?  

[Ottakee]

2 hours ago, Bootsie said:

One thing to consider is how easy it is going to be for him to access the money in the account at any point in time that he chooses.  Do you think that he will be in a position to make decisions with this money?  When to withdraw and use it?  How to spend it?  

Good point....and will he be able to say NO to others that ask for a "loan" or to buy things.

[saraha]

On 4/13/2021 at 4:31 PM, Bootsie said:

One thing to consider is how easy it is going to be for him to access the money in the account at any point in time that he chooses.  Do you think that he will be in a position to make decisions with this money?  When to withdraw and use it?  How to spend it?  

I think he will always seek help in big decision making, I am not at all confident that someone wouldn’t be able to take advantage. He has a soft trusting heart