Where should a 25-year-old keep excess cash?

[MonkeyMama]

Not certain exactly how much she's earning, but I'll assume less than $40k/yr based on what you've said... But I'd still encourage her to max out the Roth IRA, in spite of it being more than the 15% often suggested. It's only $6k, and if she can get into the habit of ALWAYS maxing out the Roth IRA, it becomes second nature and you don't even think about it anymore. I started maxing mine as a college senior earning maybe $20k/yr... but totally worth it, and I've done it ever since. Habits are important, and a simple one like $6k into a Roth IRA? There's really no downside...especially if she has cash on hand that she doesn't know what to do with.

So much this.

Heck, my 17yo maxed out a ROTH IRA this year. Too many unknowns this year and could use the tax shelter re: financial aid. As college plans start to shake out, I can see having a more firm plan for income/cash and not wanting to max out through college years. But during a complete "heck if I know" year, it was a no-brainer just to go the most efficient route. ROTHs are perfect for when you don't have a crystal ball.

[Scallywag]

So much this.

Heck, my 17yo maxed out a ROTH IRA this year. Too many unknowns this year and could use the tax shelter re: financial aid. As college plans start to shake out, I can see having a more firm plan for income/cash and not wanting to max out through college years. But during a complete "heck if I know" year, it was a no-brainer just to go the most efficient route. ROTHs are perfect for when you don't have a crystal ball.

Out of curiosity, does your teen work? S/he's had an early start. I'd like to get my DD set up with a ROTH, too, so confirming the employment situation. Does it have to be a certain MINIMUM number of hours? Does it have to be with a company or a small business? What if they work for their parents? Does that count?

Where can I learn more?

[Scallywag]

She does pay us a couple hundred dollars every month as well as covering a lot of her day to day expenses, but you're correct that overall her expenses are low. Even more so the past 9 months since she hasn't been able to go anywhere (although she was out of work for 4 months due to the shut down).

This COVID has been a real bummer. I'd check the legal requirement for the employment, to be able to contribute to a ROTH. I'd think that it should be OK since she was employed at the beginning of the calendar year?

[kork13]

Out of curiosity, does your teen work? S/he's had an early start. I'd like to get my DD set up with a ROTH, too, so confirming the employment situation. Does it have to be a certain MINIMUM number of hours? Does it have to be with a company or a small business? What if they work for their parents? Does that count?

Where can I learn more?

The only requirement for anyone to contribute to an IRA of either type is that you have earned income at least in excess of your annual contributions, and I think you also must file a tax return on that income (even if the total tax is zero due to being under the standard deduction.). I can't point you to the source document, but it's almost certainly on the IRS website FAQ's or something. Or google.

As for "earned income" that can be as a W2 employee, 1099 contractor, small business owner, or your neighborhood babysitting gig. Just can't be rental real estate income, investment/interest income, pension income, or a couple other classes of "unearned income".

[disneysteve]

Out of curiosity, does your teen work? S/he's had an early start. I'd like to get my DD set up with a ROTH, too, so confirming the employment situation. Does it have to be a certain MINIMUM number of hours? Does it have to be with a company or a small business? What if they work for their parents? Does that count?

They must have earned income that is reported for tax purposes. They can contribute up to the Roth limit or up to 100% of what they earned, whichever is less (you can't contribute $6,000 if you only earn $4,000). We had DD report her babysitting income so that she could open her Roth. Nobody ever reports that money because it's all cash but she didn't owe any taxes anyway so there was no loss to her and she gained by funding the Roth.

[disneysteve]

This COVID has been a real bummer. I'd check the legal requirement for the employment, to be able to contribute to a ROTH. I'd think that it should be OK since she was employed at the beginning of the calendar year?

She is employed. She was just out of work for 4 months of the year from mid March until Mid July. She's been back to work since then.

[Like2Plan]

I helped my 22 yo daughter with the same thing. She is living with us while she is working. She has saved up $15k and it was sitting in her USAA savings account t earning nothing. She opened a Fidelity cash management account for checking. She put $5k in a brokerage account but just in the core MM account. This is her EF. The rest went into another brokerage account and is 100% FZROX Fidelity Zero total market mutual fund. That is her retirement savings. She likes having everything in one place just like her dad.

I didn't think DH and I would like Fidelity as much as we do. DH had to use Fidelity for his workplace 401k, but over time we have realized a lot of advantages as we have tried different services that Fidelity offers. I believe we have the CMA part because we signed up for the (2% cash back) Fidelity CC, but can you also sign up for a checking account? (Right now, we just link to our old checking account). I don't think Vanguard really offers anything similar?

Last year, I did my IRA contribution through Fidelity--they make is so darn convenient. Since I convert to Roth every year I always start with a 0 balance in my tIRA. (I shouldn't say this on this board, but since I am retired-- the focus has been on funding DH's 401k first and my IRA is funded almost as an afterthought with loose change from the couch. LOL) Anyway, there are no account minimums at Fidelity and the ERs (for my selected index funds) are actually a tad bit less than Vanguard (.015% at Fido vs .04% at Vanguard).

[MonkeyMama]

Out of curiosity, does your teen work? S/he's had an early start. I'd like to get my DD set up with a ROTH, too, so confirming the employment situation. Does it have to be a certain MINIMUM number of hours? Does it have to be with a company or a small business? What if they work for their parents? Does that count?

Where can I learn more?

Yes, you need earned income for the ROTH, as everyone mentioned. My son put 100% of his wages in ROTHs this year and last year. (The IRA max is currently the lower of $6,000 or the total of your earned income).

With the pandemic... my son worked two full summers for my current employer and filled in for my last employer when they were going through a rough spot, before that. That said, he had lined up a seasonal summer job 2020 (because he was 16 all summer, minimum age for most place, and he had a car). But that was before the pandemic. He worked very part-time but very high pay for my job instead, since it got crazy busy but we didn't want to hire anyone new or train anyone at the beginning of a pandemic. If not for that, we would have told him not to bother, just stay home. The summer job was canceled, that employer never opened for 2020.

[corn18]

I didn't think DH and I would like Fidelity as much as we do. DH had to use Fidelity for his workplace 401k, but over time we have realized a lot of advantages as we have tried different services that Fidelity offers. I believe we have the CMA part because we signed up for the (2% cash back) Fidelity CC, but can you also sign up for a checking account? (Right now, we just link to our old checking account). I don't think Vanguard really offers anything similar?

Last year, I did my IRA contribution through Fidelity--they make is so darn convenient. Since I convert to Roth every year I always start with a 0 balance in my tIRA. (I shouldn't say this on this board, but since I am retired-- the focus has been on funding DH's 401k first and my IRA is funded almost as an afterthought with loose change from the couch. LOL) Anyway, there are no account minimums at Fidelity and the ERs (for my selected index funds) are actually a tad bit less than Vanguard (.015% at Fido vs .04% at Vanguard).

You'll have to check to see if you have a CMA because opening a Fido card does not open a CMA.

The CMA is a checking account. I love it. It behaves just like a checking/savings account from any other bank but you can hold anything in it (mutual funds, ETf's, individual stocks). I have bills set up to ACH out of it and I can send ACH or free wire transfers. I have not found any other account that can do what a Fido CMA can, at any bank or brokerage. We also have the Fido 2% card. Simple and the rewards go back into my CMA. $4,125 so far this year.

And you are right, Fido makes it so easy to do a backdoor Roth. They know what it is, what you are doing and how to do it correctly to avoid any unnecessary taxes or penalties. Makes it really easy to fill out the 8606 each year.

I switched to the Fido zero funds last year, so no fees at all on my total us market and total international funds. It amazes me that I pay less than $200 a year in fees on a $1.5M portfolio. My friends all use a financial manager and pay him 1.25% AUM fee plus the fund fees. So they are paying $26k for the same performance I get for $200.

[moneybags]

Another vote for the Roth IRA. I don't think you have to worry about her getting use to withdrawing from it whenever she wants. From what you've said, it sounds like she makes smart financial choices. If she hasn't qualified for the Saver's Credit in the past, maybe with her work gap in 2020 she will. It is a great credit.

[scfr]

I have a few comments and questions that aren't a direct answer to your question but are related.

Does she have an investment statement, or has she determined her desired asset allocation?
If not, might this be a good time for her to figure those things out (for herself, so she has the opportunity to possibly make some mistakes and learn from them)?

Does she have any desire to start her own business some day? If so, this seems like a great time for her to sock away as much cash towards that goal (since she has the luxury of living at home with the Mom & Pop safety net).
If not, then I'm another vote for maxing retirement & medium-to-long-term savings and boosting the percentage way above 15%. If living expenses are minimal, why not 50-75%?

LAL's suggestion of saving for a down payment towards a condo with rooms to rent out is pretty brilliant, if that's an idea that appeals to your daughter.

What about putting some of the Ally funds into no-penalty CDs? She could keep the funds at Ally, earn the same amount she is right now on her savings, be protected against future interest rate declines for 11-months, and still have nearly immediate access to the cash. If this is an idea that appeals to her, I'd suggest splitting amongst multiple CDs so that if she needs to access the funds before the CDs mature she only has to cash out what she needs.

Since she is young, what about Series EE Savings Bonds (guaranteed to at least double in 20 years so 3.5% or more)? Even if just a small amount, she could go through the process of getting a Treasury Direct account set up and learn about how it works. Note: This only works if she has some sort of calendaring system in place that will remind her to look at the bonds in 20 years and decide whether or not she wants to cash them out.

Finally, if there is a timeline for when she plans to get her own place, I'd suggest she make a list of items she'll need/want, research and make wise consumer choices, comparison shop, and then start purchasing those items (or receiving them as gifts) when it's the most advantageous price-wise. This might mean starting a list that would be acted on next holiday season during Black Friday / Cyber Monday promotions.

[disneysteve]

I have a few comments and questions that aren't a direct answer to your question but are related.

Lots of good points, scfr.

She doesn't have any sort of investment plan. Her Roth is in a 2055 Target fund which is currently 90% stock. That's the only "investment" she has. Everything else is in cash.

No desire to start a business, although she does enjoy video editing and would like to somehow incorporate that into her work life at some point even if it's just a side thing.

Buying property to rent out/share is not in her DNA. She is a great kid but she does not play well with others in a residential setting. Even sharing an apartment with one person will be a struggle for her. She lived alone through most of college because of that. I realize an apartment is better than a dorm room since she would at least have her own room but I still can't ever see her going that route.

As for preparing to eventually have her own place, she is totally onboard with buying most items secondhand. She has seen us do it over the years and has no problem doing it herself when the time comes. She'll want some items new, like a bed or a sofa, but for hard furniture, kitchen items, etc., she's fully prepared to be doing thrift shops, yard sales, and our local Buy Nothing group along with whatever hand me downs we can pass along.

[Scallywag]

Yes, you need earned income for the ROTH, as everyone mentioned. My son put 100% of his wages in ROTHs this year and last year. (The IRA max is currently the lower of $6,000 or the total of your earned income).

With the pandemic... my son worked two full summers for my current employer and filled in for my last employer when they were going through a rough spot, before that. That said, he had lined up a seasonal summer job 2020 (because he was 16 all summer, minimum age for most place, and he had a car). But that was before the pandemic. He worked very part-time but very high pay for my job instead, since it got crazy busy but we didn't want to hire anyone new or train anyone at the beginning of a pandemic. If not for that, we would have told him not to bother, just stay home. The summer job was canceled, that employer never opened for 2020.

Hi, could you share the nature of his work at your employer? My DD got certified in MS - Office this year and is of legal age to work here but there are very few positions available now. Dog walking & babysitting has also vaporized because people are (understandably) paranoid so the only positions available to her are retail.

i can't seem to think of what else she could do. She doesn't drive and won't be getting her license until she's 18 but bikes everywhere. I would really love for her to get a job now as she has really poor social skills and is terribly shy around people. A job would bring her out of her shell but I'm at my wits' end for where else she could look.

My husband is paranoid about COVID and does not want her working in retail. I'm more worried about the unpredictable hours that might make it hard for her to focus on her school work as well. That's another thing. Ugh.

All in all, I'm so over COVID so that my kid can set up her own ROTH IRA.

[MonkeyMama]

Hi, could you share the nature of his work at your employer? My DD got certified in MS - Office this year and is of legal age to work here but there are very few positions available now. Dog walking & babysitting has also vaporized because people are (understandably) paranoid so the only positions available to her are retail.

i can't seem to think of what else she could do. She doesn't drive and won't be getting her license until she's 18 but bikes everywhere. I would really love for her to get a job now as she has really poor social skills and is terribly shy around people. A job would bring her out of her shell but I'm at my wits' end for where else she could look.

For my employers, just admin assistant type work. For a 16yo, it's all about the networking. Ask anyone you know about office help. (My kid just got lucky. I don't think at my last job we would have used his help the prior 15 years, but had a need when he turned 15. Kind of same for my current job re: higher pay and strong need this year. He made 3x as much as he did last summer. We had told him to get a full-time seasonal job at 16 if he wanted to make some better money, but the office job was nice when he was only 15. This year was one-off and lucrative).

Babysitting, tutoring, walking dog, lawn service. These are all things that teens do around here. Grocery store bagging, fast food, movie theaters, etc. ~ all of that stuff is probably more limited right now and/or outside of comfort zone. I just presume that my older son will not be working this next summer. My office hired a full time admin assistant when school started back up and so we shouldn't need his help next summer. All the traditional teen jobs are such high exposure to the masses. If he needed the money, I'd probably suggest tutoring to my son (based on his strengths). But it will be a good lesson for him. The reason we work our butt off when jobs are in abundance is so we can *shrug* when things go the other way. I expect that he will learn this very first hand next summer.

Re: normal times, we encouraged our son to get a summer job at the local water park. The season is much more limited than when we worked summers at a local amusement park (another city). But I don't know how else to cram in 8 weeks of full-time work during summer, plus a few weekends before and after. Anything like that is a *great* summer job. We kind of threw it out as, "That's what we did and we made mega money in our teen years," but didn't expect him to necessarily go the same route. They will hire anyone and everyone. No nepotism or networking necessary, places like that are just desperate to fill a large amount of positions every summer. I personally went in another direction, but my husband worked his way into the accounting department and worked the seasonal amusement park all through college. The year we worked together and met we worked in cash control, behind the scenes. I *loved* that job. I share because the jobs are pretty crappy if you are only 16/17, but there's more options once you turn 18.

[disneysteve]

So here's what we decided. She is going to max her Roth for 2020. Going forward, she's going to increase what she is contributing to her Roth by 3% for now and we'll reevaluate going forward. I brought up the possibility of opening a non-retirement investment account as a next step but didn't take that plunge yet. My daughter suffers from pretty significant anxiety so it's really important to break things up into small pieces so it doesn't get overwhelming.

Thanks for all of the input. I really appreciate it.