Best IRA for an 18 year old?

[RiverRat1]

Roth or Traditional?

Assuming no withdrawals ever. Which account ends better in 40 years if taxes remain roughly the same?

[bbqfan5909]

Roth but has income limits.

[bowhuntvideo]

Wish I had put at least half mine in a Roth. No way to predict taxes or the political climate out that far but I am betting they’ll be significantly higher. It would be nice to be able to spend money without worrying about the tax implications.


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[RiverRat1]

For her to open an IRA does she need to be filing taxes on her own?

And it appears she can't put in more than she earned in 2019? I was trying to fund an IRA to get her started

[TeamAmerica]

I would call Schwab before you do anything. Roth may be good because her tax rate now is likely as low as it will ever be. As she grows her income the traditional may make more sense as you get a tax deduction but yes you need earned income to take this deduction.

[ddcainjr]

For her to open an IRA does she need to be filing taxes on her own?

And it appears she can't put in more than she earned in 2019? I was trying to fund an IRA to get her started

She has to have earned income, but doesn't have to file on her own. You can contribute up to her income if less than the limit.

ROTH is by far a better tool, especially when she will have 40+ years of growth. At retirement the majority of the value will be from growth rather than contributions. I've read the break even point for ROTH vs. Traditional is early to mid 50 years old.

[RiverRat1]

I always lean towards Roth myself. But since she's so young I wanted to make sure.

I just want her to get started saving/earning/learning/trading etc.

[dustoffer]

She has to have earned income, but doesn't have to file on her own. You can contribute up to her income if less than the limit.

ROTH is by far a better tool, especially when she will have 40+ years of growth. At retirement the majority of the value will be from growth rather than contributions. I've read the break even point for ROTH vs. Traditional is early to mid 50 years old.

Don't count on tax rates being lower in retirement--as we have discovered, thus the Roth is the best deal as withdrawals are tax-free. I'm 73 and paying taxes on the withdrawals from my Traditional

[ddcainjr]

Here is a quick example. If you deposit $5,000 per year for 20 years at growth rate of 9%, you will end up with ~$280,000.

With a traditional IRA, you pay taxes on the whole amount and a ROTH was taxed on a total of $100,000 (your contributions for 20 years). That is $180,000 of taxable income difference, or ~$40,000 of tax savings with a tax rate of 22%.

[RiverRat1]

Here is a quick example. If you deposit $5,000 per year for 20 years at growth rate of 9%, you will end up with ~$280,000.

With a traditional IRA, you pay taxes on the whole amount and a ROTH was taxed on a total of $100,000 (your contributions for 20 years). That is $180,000 of taxable income difference, or ~$40,000 of tax savings with a tax rate of 22%.

But the Roth doesn't gain the advantage of the compound earning.


Say one makes 6k
Roth - Could contribute 4k (after tax)
Trad you could contribute the full 6k

[HogHunter34]

I’m not sure on the IRA but my 401k has Roth option & the % I elected is based on my gross but it’s just taken out after taxes. So technically the same amount comes out it’s just at what point pre or post. You get the lower adjusted gross income benefit from trad IRA. Like others have said hard to predict future tax rate but in most cases you can assume you will most likely be on a lower income during retirement years.
One key difference in Roth is you are not forced to take it out & can leave it to continue to grow so its a good source of income you can delay if you fear outliving your $. Trad has to start withdrawals I believe now at 72.

[Shane]

But the Roth doesn't gain the advantage of the compound earning.


Say one makes 6k
Roth - Could contribute 4k (after tax)
Trad you could contribute the full 6k

Contribution limit for anyone under 50 in a Roth is lesser of $6,000 or 100% of taxable compensation. If she makes $6,000, she can contribute $6,000 (if she has the cash to make the contribution) - regardless of her tax bill.

Investment options are identical, so the return potential is identical as well. Returns would compound in both. Only difference is the tax treatment. Traditional gives you a deduction for each contribution in the year of the contribution, and then the withdrawals are taxed down the road. Roth gives you no deduction for contributions, but the withdrawals down the road are tax-free. The younger you are, the more years of compounded growth you get. All the growth is tax-free in a Roth (if you wait until at least 59.5 years of age before withdrawing it). The younger the investor, the more of an advantage that is. If a 60 year old contributes to a Roth and then begins withdrawals at age 65, they don't have much time for a lot of tax-free growth. An investor in her teens and 20s has decades of tax-free compounded growth potential with a Roth.

[Hooverfb]

Investment options are identical, so the return potential is identical as well. Returns would compound in both. Only difference is the tax treatment. Traditional gives you a deduction for each contribution in the year of the contribution, and then the withdrawals are taxed down the road. Roth gives you no deduction for contributions, but the withdrawals down the road are tax-free. The younger you are, the more years of compounded growth you get. All the growth is tax-free in a Roth. The younger the investor, the more of an advantage that is. If a 60 year old contributes to a Roth and then begins withdrawals at age 65, they don't have much time for a lot of tax-free growth. An investor in her teens and 20s has decades of tax-free compounded growth potential with a Roth.

This

[Throwin Darts]

The math on these threads always cracks me up.

[RiverRat1]

The math on these threads always cracks me up.

Would you prefer people not even try and remain ignorant? You can try to enlighten us if you're a guru.