18 year old making $60k a year; how should I invest? Traditional or Roth IRA?
"1) Usually, the choice between Traditional vs. Roth is whether you believe that your tax rate will be higher or lower in the future than it is now. Your income is probably in the 25% bracket now. It's hard to say whether that should be considered ""high"" or ""low"". Some people advocate Roth only for 15% bracket; but your income would probably go into higher brackets in the future, so Roth may be preferable from this point of view. Roth IRA also has another advantage that the principal of contributions can be taken out at any time without tax or penalty, so it can serve as an emergency fund just as well as money in taxable accounts. Given that you may not have a lot of money saved up right now, this is useful. 2) In a sense, it's nice to have a mix of Traditional and Roth when you withdraw to hedge against uncertainty in future tax rates and have the option of choosing whichever one is advantageous to withdraw when you need to withdraw. That said, you will likely have many years of access to a 401k and high income in your future working years, in which you can contribute to a Traditional 401k (or if no access to 401k, then Traditional IRA), so a mix will almost certainly happen even if you go all Roth IRA now. 3) I think that depends on you, whether you are a hands-on or hands-off kind of investor." With this level of income, you might consider a Solo 401(k). It would allow you a much higher level of contributions and is more appropriate for your savings than the limited IRA deposits. It also offers a considerable number of options not available for IRAs. A loan for example. "In asnwer to your questions: As @joetaxpayer said, you really should look into a Solo 401(k). In 2017, this allows you to contribute up to $18k/year and your employer (the LLC) to contribute more, up to $54k/year total (subject to IRS rules). 401(k) usually have ROTH and traditional sides, just like IRA. I believe the employer-contributed funds also see less tax burden for both you and your LLC that if that same money had become salary (payroll taxes, etc.). You might start at irs.gov/retirement-plans/one-participant-401k-plans and go from there. ROTH vs. pre-tax: You can mix and match within years and between years. Figure out what income you want to have when you retire. Any year you expect to pay lower taxes (low income, kids, deductions, etc.), make ROTH contributions. Any year you expect high taxes (bonus, high wage, taxable capital gains, etc.), make pre-tax payments. I have had a uniformly bad experience with target date funds across multiple 401(k) plans from multiple plan adminstrators. They just don't perform well (a common problem with almost any actively managed fund). You probably don't want to deal with individual stocks in your retirement accounts, so rather pick passively managed index funds that track various markets segments you care about and just sit on them. For example, your high-risk money might be in fast-growing but volatile industries (e.g. tech, aerospace, medical), your medium-risk money might go in ""total market"" or S&P 500 index funds, and your low-risk money might go in treasury notes and bonds. The breakdown is up to you, but as an 18 year old you have a ~50 year horizon and so can afford to wait out anything short of another Great Depression (and maybe even that). So you'd want generally you want more or your money in the high-risk high-return  category, rebalancing to lower risk investments as you age. Diversifying into real estate, foreign investments, etc. might also make sense but I'm no expert on those."
$10.90 for every $1000 per year. Are you kidding me!!! These are usually hidden within the expense ratio of the plan funds, but >1% seems to be quite a lot regardless. FUND X 1 year return 3% 3 year return 6% 10 year return 5% What does   that exactly mean? This is the average annual rate of return. If measured for the last 3 years, the average annual rate of return is 6%, if measured for 1 year - it's 3%. What it means is that out of the last 3 years, the last year return was not the best, the previous two were much better. Does that mean that if I hold my mutual funds for 10 years I will get   5% return on it. Definitely not. Past performance doesn't promise anything for the future. It is merely a guidance for you, a comparison measure between the funds. You can assume that if in the past the fund performed certain way, then given the same conditions in the future, it will perform the same again. But it is in no way a promise or a guarantee of anything. Since my 401K plan stinks what are my options. If I put my money in a   traditional IRA then I lose my pre tax benefits right! Wrong, IRA is pre-tax as well. But the pre-tax deduction limits for IRA are much lower than for 401k.  You can consider investing in the 401k, and then rolling over to a IRA which will allow better investment options. After your update: Just clearing up the question. My current employer has a 401K. Most of   the funds have the expense ratio of 1.20%. There is NO MATCHING   CONTRIBUTIONS. Ouch. Should I convert the 401K of my old company to Traditional IRA and   start investing in that instead of investing in the new employer 401K   plan with high fees. You should probably consider rolling over the old company 401k to a traditional IRA. However, it is unrelated to the current employer's 401k. If you're contributing up to the max to the Roth IRA, you can't add any additional contributions to traditional IRA on top of that - the $5000 limit is for both, and the AGI limitations for Roth are higher, so you're likely not able to contribute anything at all to the traditional IRA. You can contribute to the employer's 401k. You have to consider if the rather high expenses are worth the tax deferral for you. "I'm going to discuss this, in general, as specific investment advice isn't allowed here. What type of account is the $60K in now? I mean - Is it in a 401(k), IRA or regular account/CD/money market?  You are still working? Does your company offer any kind of matched 401(k)? If so, take advantage of that right up the level they'll match. If not, are you currently depositing to pretax IRAs? You can't just deposit that $60K into an IRA if it isn't already, but you can put $11k/yr ($5 for you, $6K for hubby if you make $11K or more this year.) Now, disclaimer, I am anti-annuity. Like many who are pro or con on issues, this is my nature. The one type of annuity I actually like is the Immediate Annuity. The link is not for an end company, it shows quotes from many and is meant as an example. Today, a 65 yr old man can get $600/mo with a $100K purchase. This is 7.2%, in an economy in which rates are sub 3%. You give up principal in exchange for this higher annual return.  This is a viable solution for the just-retired person whose money will run out when looking at a 4-5% withdrawal but 1% CD rate. In general, these products are no more complex that what I just described, unlike annuities sold to younger fold which combine high fees with returns that are so complex to describe that most agents can't keep their story straight.  Aside from the immediate flavor, all other annuities are partial sold (there's a quote among finance folk - ""annuities are sold, not bought"") based on their tax deferral features. I don't suspect you are in a tax bracket where that feature has any value to you.  At 48/54, with at least 10 years ahead of you, I'd research 'diversification' and 'asset allocation'. Even $60K is enough to proper invest these funds until you retire and then decide what's right for you.   Beginners' Guide to Asset Allocation, Diversification, and Rebalancing is an interesting introduction, and it's written by the SEC, so your tax dollars paid for it.  Some months ago, I wrote Diversifying to Reduce Risk, which falls short of a complete discussion of asset allocation, but it does illustrate the power of being in a stock/bond mix. The ups and downs were reduced significantly compared to the all stock portfolio.  (for follow up or to help others reply to you, a bit more detail on the current investments, and how you are devastated, eg was there a huge loss from what you had a few years ago?) Edit - The original poster hasn't returned. Posted the question and left. It's unfortunate as this was someone who would benefit from the dialog, and the answers here can help others in a similar position, but I feel more discussion is in order for the OP. Last, I caught a downvote on my reply today. I take no offense, but curious which part of my answer the DVer disagreed with." Adapted from an answer to a somewhat different question. Generally, 401k plans have larger annual expenses and provide for poorer investment choices than are available to you if you roll over your 401k investments into an IRA. So, unless you have specific reasons for wanting to continue to leave your money in the 401k plan (e.g. you have access to investments that are not available to nonparticipants and you think those investments are where you want your money to be), roll over your 401k assets into an IRA. But I don't think that is the case here.  If you had a Traditional 401k, the assets will roll over into a Traditional IRA; if it was a Roth 401k, into a Roth IRA. If you had started a little earlier, you could have considered considered converting part or all of your Traditional IRA into a Roth IRA (assuming that your 2012 taxable income will be smaller this year because you have quit your job). Of course, this may still hold true in 2013 as well.  As to which custodian to choose for your Rollover IRA, I recommend investing in a low-cost index  mutual fund such as VFINX which tracks the S&P 500 Index. Then, do not look at how that fund is doing for the next thirty years.  This will save you from the common error made by many investors when they pull out at the first downturn and thus end up buying high and selling low. Also, do not chase after exchange-traded mutual funds or ETFs (as many will likely recommend) until you have acquired more savvy or interest in investing than you are currently exhibiting. Not knowing which company stock you have, it is hard to make a recommendation about selling or holding on. But since you are glad to have quit your job, you might want to consider making a clean break and selling the shares that you own in your ex-employer's company. Keep the $35K (less the $12K that you will use to pay off the student loan) as your emergency fund. Pay off your student loan right away since you have the cash to do it. "I agree with Grade 'Eh' Bacon's answer, but there are a couple of ideas that are relevant to your particular situation: If I were you, I would invest at least half of the cash in growth ETFs because you're young enough that market variability doesn't affect you and long term growth is important. The rest should be invested in safer investments (value and dividend ETFs, bonds, cash) so that you have something to live off in the near term. You said you wanted to invest ethically.  The keyword to search is ""socially responsible ETFs"".  There are many, and if this is important to you, you'll have to read their prospectus to find one that matches your ethics. Since you're American, the way I understand it, you need to file taxes on income; selling stocks at a gain is income.  You want to make sure that as your stocks appreciate, you sell some every year and immediately rebuy them so that you pay a small tax bill every year rather than one huge tax bill 20 years from now.  Claiming about $20600 of capital gains every year would be tax free assuming you are not earning any other money.  I would claim a bit more in years where you make a lot. You can mitigate your long term capital gains tax exposure by opening a Roth IRA and maxing that out.  Capital gains in the Roth IRA are not taxable.  Even if you don't have income from working, you can have some income if you invest in stocks that pay dividends, which would allow you to contribute to a Roth IRA. You should figure where you're going to be living because you will want to minimize the currency risk of having your money in USD while you're living abroad.  If the exchange rate were to change by a lot, you might find yourself a lot poorer.  There are various hedging strategies, but the easiest one is to invest some of your money in securities of the country you'll be living in. You should look into how you'll be converting money into the foreign currency.  There are sometimes way of minimizing the spread when converting large amounts of money, e.g., Norbert's gambit.  Shaving off 1.5% when exchanging $100k saves $1500." "The Roth/Traditional decision is complex, but can be broken down into a set of simple rules.  Ideally, you want to choose to tax your money at the lowest possible rate. This specifically refers to your marginal rate, the rate you last $100 was taxed or next $100 of income with be taxed. That, in itself, is another issue, answered with questions here discussing marginal rates.  My suggestion has been that if you are in the 15% bracket, use Roth. And continue to do so until you hit 25%. At that point, begin to shift to the traditional, pre-tax 401(k) or IRA. (My article The 15% solution, goes into detail on this, although it references the 2013 tax rates. I need to re-edit). If you are already in the 25% bracket, I'd suggest just going pre-tax. Given the ability to convert, it's not as if there are 2 points in time (deposit and withdrawal) but you can decide every year if your situation changes. It's not uncommon to get married, have a baby, buy a house, and find you just dropped back down to 15% marginal rate when you were solidly 25% prior.  Let me explain why you should go 100% pretax if already at 25%.  A single person hits the top of the 15% bracket (in 2017) at $37,950 taxable. Add the standard deduction and exemption, and you are at $48,350. The tax on this is $5226, less than 10% average, despite the next $100 being taxed at 25%. It would take over $1M to have an account large enough to withdraw $40K/yr.  If you blow through that number, you hit 25%, I agree, but why pay 25% now, for sure, to avoid 'maybe' hitting 25% later? You have decades of opportunities for conversion, and even more when the funds are transferred to IRAs if you have a job change. (And the conversion discussion has multiple layers when the IRA is involved) Say you are 'too' successful. You are hitting $2M before age 55. If you retire post-55, you can withdraw from the 401(k) penalty free. But, you have 15 years before you'd start to take SS benefits. 15 years to use conversions, even if pushing into 25%, to reduce the impact of SS taxation.  My advice is not a set-and-forget solution. It's an annual evaluation of the plan for the coming year.  Further notes on my choice of ""15% Solution"" - This is the 2017 tax table for singles -  I note that median individual income is ~$30K which puts that median single at ~20K taxable. This is where the analysis begins. This earner might have upward mobility, to reach the 25% bracket and begin to save pre-tax. The goal would be to have a mix of pre/post tax money, so that over the course of their life, the 25% bracket was avoided, perhaps completely.  In general, my writing tend towards the second highest quintile, the 60-80% slice of the population. The numbers might appear arbitrary, but, in the end, the discussion has to start someplace. The concept I described here is best implemented by the single or couple who is still at 15%, but soon pushing higher than the 15/25 line. This enables them to start by saving in the Roth, and slowly shifting towards pre-tax. The final mix at retirement depends on that timing as well as their opportunities for conversions along the way.  Part of my focus on that line is that the differential is greatest in bracket shifts between 15 and 25%. Much of the benefit in the whole IRA/401 discussion is in that shift, depositing at 25%, yet withdrawing at 15%. The 28% couple might wish to avoid the 33% bracket at retirement, but that level of income impacts far fewer people, and fewer still that are either reading these boards or my other writing." You can invest another $5,500 in your Roth IRA each year, so you can invest up to $11,000 between the two tax years. Additionally you can make investments for the previous year up until 15 April the following year. In your case that will be close to graduation time, and you may decide to max out the contribution for 2014, but wait until you are settled into a new job before setting those savings aside long-term. When you start your first job, there will likely also be an option to invest in a 401k. You can still have the advantages of a Roth, but you will be limited to the investments available in the plan. Most employers I've seen today still offer a low-cost index fund, but you may have to speak up at a company meeting to pressure them to include one of those options in the plan. With a 401k your limit increases to $17,500/year. Make sure that the index fund you invest in has the lowest possible expense ratio. I use VOO. Depending on trading fees, etc., you might pick something else. "I'm not following what's the meaning of ""open a mutual fund"". You don't open a mutual fund, you invest in it. There's a minimum required investment ($2000? Could be, some funds have lower limits, you don't have to go with the Fidelity one necessarily), but in general it has nothing to do with your Roth IRA account. You can invest in mutual funds with any trading account, not just Roth IRA (or any other specific kind). If you invest in ETF's  - you can invest in funds just as well (subject to the minimums set). As to the plan itself - buying and selling ETF's will cost you commission, ~2-3% of your investment. Over several months, you may get positive returns, and may get negative returns, but keep in mind that you start with the 2-3% loss on day 1. Within a short period of time, especially in the current economic climate (which is very unstable - just out of recession, election year, etc etc), I would think that keeping the cash in a savings account would be a better choice. While with ETF you don't have any guarantees other than -3%, then with savings accounts you can at least have a guaranteed return of ~1% APY (i.e.: won't earn much over the course of your internship, but you'll keep your money safe for your long term investment). For the long term - the fluctuations of month to month don't matter much, so investing now for the next 50 years - you shouldn't care about the stock market going 10% in April. So, keep your 1000 in savings account, and if you want to invest 5000 in your Roth IRA - invest it then. Assuming of course that you're completely positive about not needing this money in the next several decades." "In my opinion, the key variable for you (and others) is not age, but ""vintage."" Your ""age"" suggests that you were born in the mid-1980s, in the middle of a bull market. The most remunerative investing periods for you are likely to be in your childhood (past) and middle age (forties and early fifties). Also your, ""old-old"" period (around age 80, in the 2060s), if you live that long. For now, you can, and perhaps should invest cautiously, like today's 40-year olds, with a heavy emphasis on bonds. The main difference between you and them is that you can shift to stocks in about ten years, in your mid to late 30s, while they will find it harder to do so when approaching old age."