Roth IRA on a student budget

**bjl584** · 11-02-2012, 05:18 AM

Congrats on thinking about investing at a young age.

Maxing a Roth for you will be near impossible. You can contribute $5000 a year. You only earn $6000 a year currently, so maxing really isn't possible. But, you don't have to max it. Putting in whatever you can is a great start. And, you are right, pulling money out for anything other than retirement is not a smart move.

Do you have any idea or knowledge about what to invest your money in within your Roth? Have you researched any funds or stocks?

**Petunia 100** · 11-02-2012, 08:44 AM

Originally posted by kellymj View Post

Hello!
I am a 22 year old college student and I have been researching Roth IRA's recently. I have had the Vanguard Star Fund recommended to me and I have almost saved up the $1000 minimum. However, I am far from knowledgeable on the subject and would really appreciate any help or tips I could get before I make the leap and invest my money.
As far as expenses go, I am lucky enough to only have one monthly bill, my cell phone ($90) and I only require $100 for personal expenses each month. However, I make approximately $500/month at my part time job and would like to invest the majority of the surplus while I still have low expenses. Should I focus on attempting to max out my Roth contributions, or should I also begin to save towards expenses that will come further down the road, such as a home or future children? I also read that you can pull a portion of your Roth contributions out to pay for a home or college tuition, but I am not sure if that is the the smartest route to plan on taking.
I really appreciate any advice or criticism that I can get! Thanks in advance for your help!

Starting a Roth is a smart move. Vanguard STAR is a good fund, it is a conservative mix of stock and bond funds. It is actively managed yet the expenses are low. Please be aware that with 1k, you also have the choice of Vanguard's Target Retirement Funds. The TR funds hold only broad-market index funds.

Contributing as much to your Roth as you can is also a smart move. However, don't neglect keeping some money in a savings account as well. You don't want to have to dip into your Roth for living expenses.

You can withdraw your Roth contributions (not earnings) at any time for any reason with no taxes or penalties. You are correct that it is probably not the smartest route to take. It is only something to consider in a true emergency. But it is good to know that if you truly NEED to tap your Roth, you can.

**kellymj** · 11-02-2012, 10:51 AM

Thanks for the advice! I should have mentioned that I plan on working full time over the summer and making approx. $2,000/month with the additional expense of also paying for my groceries. I should not need much more than $200/month for groceries but I will also be spending more fun money when I am on summer break. I would think that I would have about $1500/month to save for three and a half months out of the year. So it sounds like I should try and max out my Roth first, then start putting any surplus in my savings account? What if my summer internship (fingers crossed that I get it) offers a matching 401k plan?

Brian, I have heard that I should do a 20/80 bond and stock mix and stay well-diversified, however I do not even know where to begin with that information. Is there a book or website on the subject that either of you could recommend to me?

**bjl584** · 11-02-2012, 11:04 AM

Originally posted by kellymj View Post

Thanks for the advice! I should have mentioned that I plan on working full time over the summer and making approx. $2,000/month with the additional expense of also paying for my groceries. I should not need much more than $200/month for groceries but I will also be spending more fun money when I am on summer break. I would think that I would have about $1500/month to save for three and a half months out of the year. So it sounds like I should try and max out my Roth first, then start putting any surplus in my savings account? What if my summer internship (fingers crossed that I get it) offers a matching 401k plan?

Brian, I have heard that I should do a 20/80 bond and stock mix and stay well-diversified, however I do not even know where to begin with that information. Is there a book or website on the subject that either of you could recommend to me?

I can almost guarantee that your summer internship will not offer a 401K, or benefits of any kind. You will be an intern. Intern = cheap labor for an employer.

Since you will be making more money over the summer you can bump your Roth contributions up a bit, just remember to save some money for other things. Books for school, tuition, car expenses, and fun money.

There is a wealth of information out there to learn about investing. Investopedia is a good place to start. The "For Dummies" series of books are pretty good for someone starting out as well. There are versions for investing, trading, stocks, mutual funds, and pretty much everything else that you can think of.

**dczech09** · 11-03-2012, 08:25 AM

kellymj

As a 22 year old college student, you have a lot of time before retirement. So you can afford to take on more risk. Please do a little research before you do so, but you could probably look at a 90/10 stock/bond mix or even 100% stock.

I am 25, and I have 90/10 in my Roth IRA and 100% stock in my 401k.

The 80/20 that you are considering is not bad, but it may be a tad conservative. Maybe you could start out at 80/20, then when you are more comfortable with investing, increase your stock proportion.

The star fund is good, and so are target date funds for Vanguard, Fidelity, and T Rowe Price (the big three).

As Brian was saying, be sure to set money aside for other things. It is always good to have a cash buffer. While you COULD pull your earnings out of the Roth IRA in a pinch, it generally is ill-advised because you would be unplugging money from a good investment.

**Bayspieler** · 11-04-2012, 08:24 AM

Hey, Kellymj. I'm a newbie here, but we'll see how this answer suits you.

Is this $1000 you have your only savings, or do you have an additional emergency savings and this $1000 is another separate pile you've set aside for a Roth IRA? If you don't have any emergency savings, I wouldn't put this $1000 into a Roth IRA, at least not all of it. You are likely to need some kind of savings in the near future, and if you have to get it out of your Roth, you're likely to really dislike the paperwork and record keeping that goes with that.

As another poster said, kudos for thinking about this at a young age. I'd say go ahead and open that Roth IRA, but rather than do it through Vanguard, I'd open one at your local bank. Someone will have smaller initial deposit requirements. This means that if your $1000 is your total savings, you'll be able to Roth some of it and keep some if it on hand. Regardless, if you want to move the money into the Vanguard account later, you'll be able to do so with just a little paperwork. You'll be able to do a little more research into allocation and make a better decision on it, too.

If you want to open one this year, do it before the end of the calender year. I've tried to make deposits for the previous calender year before April 15, and it always gets messed up.

Good luck,

**Petunia 100** · 11-04-2012, 08:54 AM

Originally posted by Bayspieler View Post

Hey, Kellymj. I'm a newbie here, but we'll see how this answer suits you.

Is this $1000 you have your only savings, or do you have an additional emergency savings and this $1000 is another separate pile you've set aside for a Roth IRA? If you don't have any emergency savings, I wouldn't put this $1000 into a Roth IRA, at least not all of it. You are likely to need some kind of savings in the near future, and if you have to get it out of your Roth, you're likely to really dislike the paperwork and record keeping that goes with that.

As another poster said, kudos for thinking about this at a young age. I'd say go ahead and open that Roth IRA, but rather than do it through Vanguard, I'd open one at your local bank. Someone will have smaller initial deposit requirements. This means that if your $1000 is your total savings, you'll be able to Roth some of it and keep some if it on hand. Regardless, if you want to move the money into the Vanguard account later, you'll be able to do so with just a little paperwork. You'll be able to do a little more research into allocation and make a better decision on it, too.

If you want to open one this year, do it before the end of the calender year. I've tried to make deposits for the previous calender year before April 15, and it always gets messed up.

Good luck,

Opening an IRA at your bank means either putting your long-term investment dollars in cash or buying load-funds. Neither of which is a good idea. A much better idea is simply to wait until Kellymj can put away 1k and still leave herself some cushion.

Also, I have never had any problems with my IRA contributions being credited to the year I specify. If I did, I'd have to evaluate whether my custodian was competent. Were you able to get the matter resolved?

**Bayspieler** · 11-04-2012, 01:53 PM

Originally posted by Petunia 100 View Post

Opening an IRA at your bank means either putting your long-term investment dollars in cash or buying load-funds. Neither of which is a good idea. A much better idea is simply to wait until Kellymj can put away 1k and still leave herself some cushion.

I generally agree with you. But, if Kellymj wants to have an IRA just to have one, though, I'd suggest starting with a cash IRA at the bank. I'd move it out of there as soon as I started accumulating enough to get into something like a Vanguard account. If (s)he wants to re-allocate later, it's a simple matter.

I don't think that the idea of setting aside something like $200 just to start an IRA is a bad idea, either, since it builds life experience. Of course, your mileage may vary

Also, I have never had any problems with my IRA contributions being credited to the year I specify. If I did, I'd have to evaluate whether my custodian was competent. Were you able to get the matter resolved?

Well, it's a long story, but I put in something like $100 for the previous year in March (before April 15) and the company incorrectly put it in for that year. Then, after April 15, I put in a full contribution for that year, and they told me that I had over-contributed for the year. Even though I pointed out that they had made the mistake, they told me they had already reported everything to the IRS, so there was nothing I could do but take a $100 early withdrawal to make sure I kept it legal. The penalty was something on the order of $10, plus a tax form headache that year, but I didn't find it worth the trouble to argue for any compensation. I'm not dealing with that company any more though.

**Petunia 100** · 11-04-2012, 02:38 PM

Originally posted by Bayspieler View Post

Well, it's a long story, but I put in something like $100 for the previous year in March (before April 15) and the company incorrectly put it in for that year. Then, after April 15, I put in a full contribution for that year, and they told me that I had over-contributed for the year. Even though I pointed out that they had made the mistake, they told me they had already reported everything to the IRS, so there was nothing I could do but take a $100 early withdrawal to make sure I kept it legal. The penalty was something on the order of $10, plus a tax form headache that year, but I didn't find it worth the trouble to argue for any compensation. I'm not dealing with that company any more though.

That is terrible customer service on their part. While it may have been true that they had already filed the Form 5498, all they needed to do was amend it. I think you did the right thing, I would be done dealing with that company too. Anyone can make a mistake. But once it is called to their attention, they should be willing to fix it.

Roth IRA on a student budget