Help a Reader: Invest in a Roth IRA Now or Wait?

Here's a question I received recently from a reader:

I'm a college student (22) who will be graduating in a few months, and I'm just starting to get my finances set up properly. I have a part time job that makes me a few bucks, and I've got about $3,200 in a high interest savings account, some of which I'll need to get myself established after graduation, though I expect I'll also be pulling in a bit from my family at graduation so probably not all of it. I figure that I can throw about $1000 or so into a  ROTH IRA now. After seeing about the difference time makes, it just seems like a wise idea even if I don't have a ton of income right now. Is it worth it to try to deal with fees and restrictions, or should I just wait till I have a full time job? I already have a savings account with Etrade and am considering opening a retirement account with them.

So, what would you suggest he do?

Comments

[Andrew]

Frankly, go for it. If you've got the mind to set one up now, and the cash to do so, run with it. Keep the rest as emergency cash, and start tossing spare change into the Roth whenever you can. I opened up my Roth while in college, and contribute my weekly spare change (5-10 bucks) a week right now (The bulk of my retirement is drawn out pre-tax into 457/401ks). If I ever come upon a lot of cash that I don't need, it goes into the Roth too. It's a nice place to dump cash.

[cory]

Start it now. If you're nervous about needing that money a few months down the line, just start up an IRA with monthly payments. A lot of brokerages will waive minimum balances if you schedule automatic purchases.

An important thing to note is that if you set up automatic payments now, you're probably not going to cancel them later. If you wait to open the account, you'll probably keep finding other reasons not to open it for a few months.

[Matt]

I would recommend keeping it with your high interest savings for the time being. My reason is that there are a lot of unexpected expenses when you're first starting out on your own, especially if you have to relocate for your job, and it will probably be 3 or 4 weeks before you start getting a regular paycheck. There's a good chance that you'll need something to fall back on, and an even better chance that it will need to be more than you think.

If you find yourself in a good financial position 6 months from now, I would say go ahead and put it into an IRA. But hang onto it for the time being.

[Stupid Gossip for Smart People]

Most places require a certain minimum- with Vanguard, it was 3k, although I think some places waive it if you automatically invest. And you should wait until you have a steady income to set up something like that, so I would wait. But good for you for thinking about it!

[Tim]

I would recommend a Roth only if you can find Broker that charges NO annual fees for only $1000 balance. You also want to be selective on how you invest it. If you invest in a Mutual Funds, select one without a transaction fee. Some transaction fees can be $35. $35 on only a $1000 investment takes away 3.5% right out of the gate. If you purchase a stock or ETF, you might pay $20 or more that would take away 2% from the get go. And don't forget if you need to close your account for any reason, you will get hit with fees.

My 2 cents,
Tim

[KC]

Scottrade is $500 min, no annual fee. I asked the same question of my family 2 years ago and went for it. Even if it's only $500, it's worth it.

[Blaine Moore (First Time Home Owner)]

I'm with Tim; if you can avoid fees for such a low balance then go for it. However, there is one caveat to that. If you think that you'll be fully funding your Roth and then some once you start working, then you can make an initial payment for another 5 days against your 2006 contribution which will let you get a little extra in this year than you otherwise could contribute if you waited another week to start your account.

On a related note, at Vanguard, (and I don't know if this would apply anywhere else or not since I am with them and am very happy,) there is a $3k minimum. They have two different $5 fees per year (paid $1.25 per quarter), one that goes away once you have a $5k balance and one that goes away once you have a $10k balance with them. If your institution that you are going with has a similar maintenance fee structure and the fee doesn't go away until you have anything over $4k in the account, then you will want to go ahead and start it now.

As long as you know that you are going to start once you are working and get set up, then waiting probably isn't a bad idea. Matt is right in that there are a lot of expenses to moving and getting settled into a new home and a new job, and the paychecks can take a little while to begin arriving. I got around those expenses and a lack of cash flow by borrowing a few thousand dollars from my mother which I then paid back over the following months.

[AP]

I'm with Cory, above. Start now with automatic monthly amounts, so that if you do need that money as you're starting out, it will still be there. I started my Roth when I was still in college (and totally poor!), and put just $50 a month into it at that time. I don't think I ever really missed that money, and I still consider it one of the best decisions I made at that age.

Monthly investments also have the advantage of buying shares throughout the, so you get closer to an average cost over the year, whereas a lump sum investment will buy in at whatever the rate is at the time - which of course COULD work out in your favor if the cost is low at the time, but it's hard to tell when that time is.

[Jo]

Personally, I would wait unless you have alot in your other savings account that you can use to fall back on. There are so many costs to just starting out...take it from me, the real world is very expensive ;) And unless you have wealthy and generous relatives that will give you alot at graduation, I don't really know how much you can count on your graduation gifts to help you along. I would atleast wait a couple more months until you know for sure where you are going to be at physically and financially. Honestly considering where you find a job and when you find a job will really determine how much money you will need to start out. Just my two cents.

[mapgirl]

I vote with Matt right now. I would leave it in a high yield account till you have a full time job and steady paycheck. God forbid you get sick and need to pull the money out for hospital bills. When you are able to participate in a company sponsored plan, there may be a Roth option for you, but use this money as your emergency fund since it sounds like you don't have one already.

[segfault]

If you have the discipline not to spend it (and it sounds like you do), keep it in an online savings account--you have until tax day in April, 2008 to make your 2007 contribution. I'd suggest one of the Vanguard Target Retirement funds (not sure of the minimum), or Vanguard Star if the retirement funds have higher minimums. You may pay a low-balance fee for a couple of years, but once you build up the balance in the account, it will disappear.

[Moose]

I wouls also say to go for it. The best time to invest in a Roth (and I'm suprised no one mentioned this) is when you are reasonably sure that your income tax rate now will be lower than your income tax rate when you retire, as a Roth is taxed now, and an IRA is taxed when you withdraw. Since you are in school and your tax rate is low, now would be a great time to contribute to a Roth, so go for it...

[Lauren]

I'm in essentially the same situation (21 and graduating) and I just opened up my Roth a few months ago with T. Rowe Price. They have no minimums on their accounts as long as you sign up for systematic investing... I put in $100 when I opened my account and have been putting in $50 each month since. It's not very much, but since I have grad school and a wedding approaching soon, that's pretty much all I can afford right now. So if you're hesitant about dropping all $1000 into an account at once, you might try to do something like this and start out really slow until you know you won't need to money.

[bigbuddha]

Yes, start NOW!!! ... just look at the numbers, investing in $1000 today with no additional contributions 40 years from now at 10% means it'll be worth 45,260, disregarding taxes of course.

Now if you could find your way to earning 15% as the market has done in Australia historically then it'll be worth $267,860.

Your future self will thank you tremendously.

[Andrea]

You do need some sort of emergency fund before you start investing. However, even a small amt invested now in a ROTH will benefit you in later years.
You can set up a ROTH with ING .....their minimums were pretty low when I looked at them last year...you might want to check them out. Also, should you invest in a ROTH and then need the money later, you can always remove the original amt at any time for any reason, it's the earnings you can't touch without meeting the special requirements. So you could give it a go and if all works out fine, great. If you do need to get at the money, you can. Hope that helps.

[db]

I'd set it up now -- I have my Roth IRA with TRowe Price in one of thier retirement funds (TRowe Price and Vanguard have consistently had the highest ranked retirement funds). The great thing about TRowe Price is I was able to open the IRA on their plan to start it with $50 and a minimum $50/month systematic investment (with this option they waive certain low-balance account fees too).

If he could swing that then he could keep a majority of his cash. I think otherwise he'd need $1000 to start the TRowe Price Roth IRA, which is what he has.

I've been very happy with them.

DB

[Andrew]

ING Roths only require 250 per fund, which is nice for the starting investor.

[zen]

I'd consider thinking of your savings as being $2200, not $3200. Think of it that way until after graduation, and after the wedding plans - try to ignore the money like it's not there, and if, after all that you're still comfortable not having access to it - do it.

You should have an emergency fund, and you shouldn't be putting *anything* on a credit card for your wedding/graduation. But if that is all set - go for it.

[finance girl]

I'd do it. Why? Because it gets you started into the habit and because then that money is mentally allocated away. I'd put it in an index ETF, like EFA, EEM, or VTI. These are low cost (even cheaper than index mutual funds).

[Ear]

How do the index ETFs work? For example, I currently have my ROTH money going to TRRKX in an E*Trade account but hadn't been all that happy with the performance. These ETFs you list seem to kicks its butt. But, do you have to buy whole shares with them or can you buy partial shares like you can with a mutual fund?