retirement fund for 21 year old

[buzz2400]

My 21 year old son wants to start putting money away for retirement (like a 401 K). What is the best option for him to do it himself. company he works for does not have a 401k.

 

[robsmom]

My 21 year old son wants to start putting money away for retirement (like a 401 K). What is the best option for him to do it himself. company he works for does not have a 401k.

Since he is 21 and hopefully in the lower end of his earnings I would suggest a Roth IRA. This will not give him a tax benefit this year but all of the earnings will be tax free. He has a lot of years to have earnings and in the long run that should be better than a regular IRA. In a regular IRA he gets the tax benefit now but pays taxes in 40 years or so on his earnings.

 

[dhuba]

Yes, definitely a Roth IRA. I made my son open one when he was 18. He works nearly full time and goes to college but he has fully funded it for four years, plus his job now has a 401K with matching so he maxes that too. You can never start too early. He used to put up a fuss when I asked him if he transferred any money into it lately, but now he sees it growing so he already fully funded it for 2013. As long as you work and are within income limits, you can open a Roth. Glad your son sees the benefit of saving early. Mine really took some convincing.

 

[MrsPete]

I say HOW he saves is secondary to THAT he saves!

 

[BuzznBelle'smom]

My only objection to Roth IRAs is, I'm not confident the government won't turn around and decide to tax them down the road. I base this on the government's insatiable appetitie for funds, and they've gone back on their word with things like Social Security--it was never supposed to be taxed, but now it is.

So, if he's paranoid like me, he could do a regular IRA (get the tax benefit now, pay taxes later). Or he could take his chances with a Roth. either way, the important thing is for hims to start early and take advantage of compounding.

Another advantage to the Roth is, in 5 years, he could, theoretically, take out the amount he started with. While this isn't a great idea financially, if he were to hit hard times at some future point, he could tap some of this money without penalty. I know there are occasions when you can tap retirement accounts for a home purchse, etc., but the Roth is the only one you can tap without penalty (up to the amount you put in, after a 5-year waiting period). I'm sure you (and he) are hoping that he would never need to do this, but it's kind of nice to know that he could if he were really strapped down the line.

 

[sherry7]

Good thread, I'm subscribing to this. My 23 year old son recently got his first "real" job, and I've been telling him that he should open up some sort of retirement fund.

 

[brymolmom]

I like the Roth idea too.

And, THIS IS CRUCIAL, see if his employer will do direct deposit and deposit the Roth $$ into a separate account and have him setup a monthly auto-pay from this bank account to his Roth account. Even if it's only $10 - $25 a shot, by making it automatic - it will be done (and eventually he won't even miss it).

Wonderful to start this at 21!!!

Another tidbit to share is to try upping the monthly amount by $2 - $5 each time he gets a pay raise over the coming years.

 

[soccerchick]

Great advice - always pay yourself first. Any pay raise, increase your savings amount - you won't miss what you don't ever really see.

Great job raising your son to be financially savvy!

 

[Jasonkat]

My only objection to Roth IRAs is, I'm not confident the government won't turn around and decide to tax them down the road.

The government WILL tax Roth IRA distributions when this 21 year old is ready to retire in 2060. That's is a guarantee.

Regardless what some politicians say, Medicare, Obamacare, and Social Security are mathematically impossible to continue at their "promised" levels after about 2040. And you can't raise taxes on the rich enough to pay for them either. So middle class taxes will have to go up. Or we'll have to change SS, Obamacare, and Medicare. But I highly doubt The People will allow SS, Obamacare, and Medicare to be changed as drastically as they need to be changed for them to be sustainable. It's all demographics: When Medicare was passed in the 1960's there were 20 workers per retiree. In 40 years it will be 2 workers per retiree. The Government will have to increase taxes somewhere and The People will not allow Middle Class Tax Increases. So what will the government do?

One of the easy sources of funds the government will have will be taxes on Roth IRA distributions for "wealthy" individuals. "Wealthy" will be defined just like it is for Social Security taxes now: $36,000 retirement income = wealthy. This is an under-the-table type of tax that people don't really know about so it will be easy to pass. Much easier than increasing income tax levels. So if you expect to have a decent retirement income you should expect your Roth distributions to be taxed (probably starting in 2035 or so)

That being said the Roth IRA is still the best choice. Why? Because in 5-10 years when he's in his late 20's or early 30s and he buys a house he can take out the contributions and earnings from a ROTH IRA tax-free for the downpayment. That law isn't going to change over the next 10 years. Once he buys a house he should probably fund a 401k and forget the ROTH IRA, but right now he should use the Roth as a down-payment savings vehicle.

 

[davedmaine]

My 21 year old son wants to start putting money away for retirement (like a 401 K). What is the best option for him to do it himself. company he works for does not have a 401k.

Yes, go with a Roth. Smart kid..

 

[ICF]

The government WILL tax Roth IRA distributions when this 21 year old is ready to retire in 2060. That's is a guarantee.

Trying to guarantee anything involving 50 year into the future and politicians is foolish.

Those suggesting a Roth have the best idea.

 

[wiigirl]

I would talk to a financial advisor but we started Roth IRA's for both our girls.

 

[Jasonkat]

Trying to guarantee anything involving 50 year into the future and politicians is foolish.

The only certainties in life are death and that the government will keep increasing taxes. I feel very confident in my prediction that the government will need to expand its taxes within the next 50 years.

 

[MSSANDRA]

I am quite impressed with your son!

Political views aside, I agree with a Roth IRA. I also recommend to max out any company matching as soon as he can and as long as he can. There may be periods in his life that is not possible but doing so when he can will certainly pay off. I would advice him as he goes forth in job searches to look at retirement plan as close as insurance or any other benefits. Something that has gotten more popular around our area is investing in property investment with rentals as a retirement investments. People are wanting to be assured they do not count on the government to provide any assistance. I wish we had started this sooner but we are just getting into it and it looks to be a positive thing for us. Of course we have other things too.

 

[Jasonkat]

Political views aside, I agree with a Roth IRA.

Some see politics in everything.

The topic is "retirement fund for a 21 year old". How can we discuss retirement savings without discussing the future of Social Security, Medicare, and Taxes? If you want to say that bringing up those topics is "political" then I guess that's your point of view. But to me ignoring them would be like saying you're looking for advice about sailing around the world but you're not going to discuss the type of motor your boat will have, how big your boat is, and the size of your boat's gas tank. You COULD ignore those topics but it'd be stupid to do so.

If you want to project future retirement "living" you HAVE to make assumptions about what SS, Medicare, and taxes will look like. If you don't you're not making a wise financial plan.

Now, given what I just wrote, I would argue that my view is not a political view. It is a mathematical view. 2 + 2 = 4 is not political. Saying that when Medicare was passed into law there were 20 workers per retiree and in 40 years there will be 2 workers per retiree is not political.

It is a known fact that Social Security and Medicare can't continue on as they are right now. That's not political, that is a mathematical fact. For gosh sakes, even the Social Security Administration has it on their website that in 2033 it will only be able to pay 75% of promised benefits unless there are changes to taxes or the SS system. The SSA had that on their website under Bush and under Obama. It's not political, it's just a fact.

So if I were 21 and investing for my future I'd like to take into account the known fact of increased taxes in the future to pay for the growing elderly population. That's not political, it is demographic and mathematical. And given that demographic information I'd like to make some assumptions about whether Roth IRAs are likely to remain "tax free". To me that is wise financial planning. Because if Roth IRAs will not be tax free in 2060 it really throws a monkey wrench into the whole "The Roth is the best thing for you" plan, doesn't it?

 

[ICF]

If we're going to play, guess the tax / political impacts of a Roth IRA for 2060.....

My guess is...if (when) there is a change made that it will be something where all balances prior to X date (whenever a change MAY be made) can still be removed tax free and only additional balances will be taxed.

I will be surprised if a person that has saved under a Roth plan for 30 years goes to start cashing out and all of a sudden is taxed on the back end as well on their entire portfolio...due to a plan change just before retirement.

 

[Jasonkat]

If we're going to play, guess the tax / political impacts of a Roth IRA for 2060.....

Retirement planning is ENTIRELY about "guess what is going to happen over the next 40 years".

How do you know how much you should save each month? You project the return on your investments. Isn't that as ridiculous as guessing the tax/entitlement structure 40 years from now? There are no certainties in retirement planning so if you're going to accept that it's all about projections then projecting Social Security in 2060 is not any stupider than projecting the stock market will return 7% on average between 2013-2060.

If I was a betting man I'd say this is what will happen:

Two lines will be added to the 1040 for Roth IRA distributions. First, Roth IRA distributions will be added to your Adjusted Gross Income. Then a line will be added after AGI but before Taxable Income. This line will be a deduction of your Roth IRA distribution. So what you will have is your distribution will be included in your AGI but not your taxable income. Roth IRAs distributions still will be non-taxable (promise kept). Now, your AGI will be higher the more money you get from your Roth. Your Social Security benefits will phase out based on your AGI, so the more AGI you have the less Social Security you will receive.

With this structure the government can say they aren't taxing Roth IRAs. They're just forcing you to claim your Roth IRA retirement distributions as income. And then once you've claimed it as part of your income all they're doing in limiting the amount of Social Security a "rich" person can receive. If you happen to receive a lot of income from your Roth IRA you will be "rich" and you won't deserve Social Security.

How can I make that prediction? Because it's exactly what happened with Social Security benefits. Prior to 1986 they were not taxable. After 1986 they were taxed if your AGI was above a certain amount. Why wouldn't they do the same type of thing for Roth IRAs?

 

[dbs1228]

Wow all really good points! All 3 of my daughters have a Roth started and they are 17, 20 and 21. I did not realize they could use the roth for a down payment on a house and not be penalized - this is great to know although I hope they will not need to use it for that and it can grow. I did have our financial adviser say it was great they are doing the Roth but when I said "can't beat 40+ years of growth tax free his only comment was "yes unless they change the rules/laws" It did get me thinking but at this point I think the Roth is the best bet for them.

 

[ExPirateShopGirl]

Roth. It will give your child the greatest flexibility with the funds.

 

[buzz2400]

thanks for all the replies. going to go with roth.

With regard to possibly being taxed in the future: I feel it would be better to have a nest egg and be taxed then to have nothing at all.