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I want to start investing monthly in a Roth IRA. Currently looking at no-load mutual funds and leaning towards Yacktman funds (YACKX). Currently 27 years old, 1st child born 3 weeks ago, looking to use Roth IRA for college education in 18 years. Any suggestions or help would be appreciated, found many interesting topics and discussions on this forum. Thanks in advance.
Have you considered using a 529 account for baby's college education. ROTH IRA will give you more flexibility (i.e. you don't have to use it for college, you can also use it for retirement). But I do prefer to keep retirement separate from kids college if you can swing it.
Do you already have a brokerage account (fidelity, charles schwab, etc)? Which one? I'm trying to get an idea of which funds may be available to you. Most discount online brokers have some low minimum investment mutual funds that you can choose from for an IRA. But there are also some funds that still require $2,500 or more as an initial investment.
DplhcOracl gave some good options. I will add a few more:
FPACX FPA Crescent GLRBX James Balanced Golden Rainbow EXWAX Manning & Napier World Opportunities ARTGX Artisan Global Value Inv
A few questions that might help us to help you. Do you want a balanced fund with stocks and bonds? Domestic or international fund? Risky or conservative? In my recommendations, I tried to stick with funds that could be considered as a core part of your portfolio.
My note is that I'd actually suggest the more aggressive form of inflation protection of Pimco Commodity RR (PCRDX for D shares, I think), given the age and given the long-term reinvestment of the rather large distributions of the fund has had a history of throwing off. Not to say that Permanent Portfolio isn't great, but I'd recommend it for those closer to retirement.
First, congratulations to both of you; and to looking forward for your newborn.
ROTH IRA's, a few things to consider:
---A ROTH IRA will be limited to $5,000/year and less if your income is more than $105K/year. ---Your household will be subject to a 10% early withdrawal penalty (as you or your wife will not be age 59.5) and regular taxation of any monies drawn for your child's use for educational purposes. FED and STATE..... ---You will not have your "own" ROTH for retirement
529 college accounts:
---negative....you may only reallocate the invested monies once per calendar year. This is subject to change.
---positives: 529's generally allow (varies state to state) to investment up to $325K into the account, at which time no further investments may be made, BUT...anyone may place the monies into the account......so, if you can convince a total stranger to fund the 529; NO problem with where the money comes from. Relatives may give to you or the fund directly for bdays and such for your child.
---you may qualify for state tax breaks using a 529 from your home state.
*****although the ability to move money around in a 529 is restricted to the once a year thingy; most 529's have enough fund choices to create a balanced "fund of funds". Also, one is not restricted to using a 529 from your own state and if you find 5 different 529's that you like from 5 different states, you may open a 529 with each state.
GOOGLE the words: 529 "and the name of a particular state" to find plan info. Also, Savingforcollege.com has some features to review that do not require a subscription.
NOTE: you will find "broker" sold 529 plans. I would avoid the extra cost of this arrangement; unless you are not comfortable with deciding the investment allocations.
(1) Yacktman and most others allow you to establish monthly contribution plans without putting any money up front. Great way to start investing-almost as "painless" as payroll deduction. You are also allowed to change the amount at any time or stop completely once you reach the normal minimum. Linked Yacktman's IRA application (see section #5). Not trying to push you to Yacktman because I know absolutely nothing about them. Just wanted to show how these AIPs work.
(2) Recommend you try to keep this money separate from your retirement funds, as 00BY mentioned, and also that you devise some form of graduated allocation model for the college money so as not to have it all in the stock market as college begins. Example: you could allocate 100% to an equity fund during the first year. Than move 5% of the total to a short-term bond fund, laddered CDs or other low risk product at the beginning of each new year. When the child turns 11, you'd have half the money safeguarded from the gyrations of the stock market. At 16, you'd have 75% so positioned. I considered target date retirement funds. However, these assume you are going to live an additional 30 years or so after their stated retirement date. Some still hold 50% in equities at that time. Wouldn't advise using them for this purpose.
1. If you & your wife have an employer who provides a match to your 401k you double each dollar invested...do this first.
2. After you max this out, both of you should contribute to your ROTH.
3. Finally, its a toss up whether you should fund a taxable accounts (think emergency fund, rental property, land, art, collectibles) in your names or a college plan in your children's name. My experience is that your family will be better served if you first provide for your retirement...not college. College will take care of itself with grants, scholarships, work study and student loans. After all of these student based opportunities are realized you may very well assist your kids with your money. But, when you designate your money early on in their names (529 Plans) formulas like (FAFSA) change dramatically. You actually hinder your son or daughter chances at these need based college financial programs because you sacrificed your retirement plan. Later, will they resent the fact that you are broke in old age and you need their help? The best gift we can give our kids is often our own financial health.
Remember that this will be a first fund, not your final portfolio. Mr. Yacktman, blessed in mind and apprehension, is about 70 now and while there are a few 88-year-old fund managers . . .
Over time, it would be wise to shift your asset allocation toward short-term investments so there's less risk of a catastrophe when your child's in high school. Three ways to do that:
1. monitor the allocation and shift it yourself (maximum control, maximum prospect for forgetting to)
2. invest in a 529 with an age-option. Iowa, for example, has an age-track that invests in a changing mix of Vanguard index funds. Dull but predictable.
3. invest in a retirement date fund, where the "retirement" date is about the same as the start date for college (2025 or 2030, I'd guess). These funds are broadly diversified, but become more conservative every few years. My own preference would be for one of the T. Rowe Price Retirement funds. Retirement 2025 (TRRHX) is 60% US stocks, 20% international (including a sliver of emerging markets), 20% income (including slivers of commodities, junk, e.m. and international bonds).
Congratulations on your new family member. I salute you for looking ahead to college savings. I recommend:
1) You think of this investment task as initiating construction of a portfolio. Choice of fund should be subordinated to a plan for asset-allocation. See savingsforcollege.com for an overview of how different 529 plans approach the idea of age-based allocation. I suggest this not to steer you toward any particular model, but just as a prompt for your own thinking about what sort of allocation you want to choose now, and how you might like to change it over time.
2) Although saving for college is similar in some respects to saving for retirement, I think it is important to remember the differences (particularly if you choose to adapt a target date retirement fund for this purpose). To me, the major differences are that the timeframe for college savings is generally shorter, and then the spending period is much shorter. Both differences imply being more conservative with education money than you would be with retirement money.
3) I assume that you chose the Roth IRA approach over the 529 approach because you preferred flexibility about the ultimate use of the money, and about choice of investment vehicles. I have twice had to reclassify 529 money (once for unpleasant, and later for pleasant reasons), I believe this to be a canny choice. While it seems appealing to keep money in separate bins for separate purposes, many unexpected things can happen in 18 years. Unexpected events tend to occur life-wide; they don't respect the categories for money that our plans depend upon. It is humbling enough to have to change plans without also having to pay penalties.
Can we have open multiple 529 plans? I live in CA state. I thought I was eligible only to open 529 plan in CA state. I can't go and open 529 plan of other states. Because 529 plans are state plans. For example 529 plan of virginia can be opened by only virginia state residents. I found this a year ago.
You can open 529 in any state. However, if there are some tax benefits that your home state is offering, you should strongly consider home state plan.
I live in Texas but invest but use West Virginia Smart529 Select Plan (smart529select.com). This is the only plan that incorporates funds from DFA Funds.
Thanks to everybody for your great input. From reading all the other topics, I knew all your input would be helpful and unbiased. Talking to financial people you never know what to believe or if just telling you based on what they sell. I'd appreciate anymore input you have, am looking at starting this in the next 3-6 months. Just trying to get as much info as possible to help in our decision. I am from Illinois and know the 529 gets a bad rap here, one of the reasons looking at Roth. But again still open for any advice. Thank you all again!!!
YES, but the limitation of $5K per year and foregoing one's part of a retirement plan would not be my personal preference. One may, if I recall the IRS info properly is that a 529 annual limit is $13,000K per year.
Most 529 plans let you invest automatically in small amounts each month ($50). I say this b/c if the Illinois 529 plan has a bad rap now, then it will surely be changed (It might change a few times in 18 years). So you could consider doing both, a Roth and a 529. The 529 will also give you state and federal tax benefits.
Comments
YACKX is an excellent choice. Other funds I would consider are:
1. ARVIX Aston/RiverRoad Independent --- managed by Eric Cinnamond, formerly of Intrepid Small Cap Value.
2. FPACX FPA Crescent
3. BERIX Berwin Income
4. ICMBX Intrepid Capital
5. PRPFX Permanent Portfolio
6. MFLDX Marketfield Fund
Have you considered using a 529 account for baby's college education. ROTH IRA will give you more flexibility (i.e. you don't have to use it for college, you can also use it for retirement). But I do prefer to keep retirement separate from kids college if you can swing it.
Do you already have a brokerage account (fidelity, charles schwab, etc)? Which one? I'm trying to get an idea of which funds may be available to you. Most discount online brokers have some low minimum investment mutual funds that you can choose from for an IRA. But there are also some funds that still require $2,500 or more as an initial investment.
DplhcOracl gave some good options. I will add a few more:
FPACX FPA Crescent
GLRBX James Balanced Golden Rainbow
EXWAX Manning & Napier World Opportunities
ARTGX Artisan Global Value Inv
A few questions that might help us to help you. Do you want a balanced fund with stocks and bonds? Domestic or international fund? Risky or conservative? In my recommendations, I tried to stick with funds that could be considered as a core part of your portfolio.
First, congratulations to both of you; and to looking forward for your newborn.
ROTH IRA's, a few things to consider:
---A ROTH IRA will be limited to $5,000/year and less if your income is more than $105K/year.
---Your household will be subject to a 10% early withdrawal penalty (as you or your wife will not be age 59.5) and regular taxation of any monies drawn for your child's use for educational purposes. FED and STATE.....
---You will not have your "own" ROTH for retirement
529 college accounts:
---negative....you may only reallocate the invested monies once per calendar year. This is subject to change.
---positives: 529's generally allow (varies state to state) to investment up to $325K into the account, at which time no further investments may be made, BUT...anyone may place the monies into the account......so, if you can convince a total stranger to fund the 529; NO problem with where the money comes from. Relatives may give to you or the fund directly for bdays and such for your child.
---you may qualify for state tax breaks using a 529 from your home state.
*****although the ability to move money around in a 529 is restricted to the once a year thingy; most 529's have enough fund choices to create a balanced "fund of funds". Also, one is not restricted to using a 529 from your own state and if you find 5 different 529's that you like from 5 different states, you may open a 529 with each state.
GOOGLE the words: 529 "and the name of a particular state" to find plan info. Also, Savingforcollege.com has some features to review that do not require a subscription.
NOTE: you will find "broker" sold 529 plans. I would avoid the extra cost of this arrangement; unless you are not comfortable with deciding the investment allocations.
This link regards the current IRA rules and regs.
http://www.irs.gov/publications/p590/index.html
Everything is subject to change and I may have forgotten something; but this will give you something else to chew upon.
Take care,
Catch
(1) Yacktman and most others allow you to establish monthly contribution plans without putting any money up front. Great way to start investing-almost as "painless" as payroll deduction. You are also allowed to change the amount at any time or stop completely once you reach the normal minimum. Linked Yacktman's IRA application (see section #5). Not trying to push you to Yacktman because I know absolutely nothing about them. Just wanted to show how these AIPs work.
http://www.yacktman.com/pdfs/iraapp.pdf
(2) Recommend you try to keep this money separate from your retirement funds, as 00BY mentioned, and also that you devise some form of graduated allocation model for the college money so as not to have it all in the stock market as college begins. Example: you could allocate 100% to an equity fund during the first year. Than move 5% of the total to a short-term bond fund, laddered CDs or other low risk product at the beginning of each new year. When the child turns 11, you'd have half the money safeguarded from the gyrations of the stock market. At 16, you'd have 75% so positioned. I considered target date retirement funds. However, these assume you are going to live an additional 30 years or so after their stated retirement date. Some still hold 50% in equities at that time. Wouldn't advise using them for this purpose.
1. If you & your wife have an employer who provides a match to your 401k you double each dollar invested...do this first.
2. After you max this out, both of you should contribute to your ROTH.
3. Finally, its a toss up whether you should fund a taxable accounts (think emergency fund, rental property, land, art, collectibles) in your names or a college plan in your children's name. My experience is that your family will be better served if you first provide for your retirement...not college. College will take care of itself with grants, scholarships, work study and student loans. After all of these student based opportunities are realized you may very well assist your kids with your money. But, when you designate your money early on in their names (529 Plans) formulas like (FAFSA) change dramatically. You actually hinder your son or daughter chances at these need based college financial programs because you sacrificed your retirement plan. Later, will they resent the fact that you are broke in old age and you need their help? The best gift we can give our kids is often our own financial health.
I believe u can remove ur contributions in Roth without penalty.
Remember that this will be a first fund, not your final portfolio. Mr. Yacktman, blessed in mind and apprehension, is about 70 now and while there are a few 88-year-old fund managers . . .
Over time, it would be wise to shift your asset allocation toward short-term investments so there's less risk of a catastrophe when your child's in high school. Three ways to do that:
1. monitor the allocation and shift it yourself (maximum control, maximum prospect for forgetting to)
2. invest in a 529 with an age-option. Iowa, for example, has an age-track that invests in a changing mix of Vanguard index funds. Dull but predictable.
3. invest in a retirement date fund, where the "retirement" date is about the same as the start date for college (2025 or 2030, I'd guess). These funds are broadly diversified, but become more conservative every few years. My own preference would be for one of the T. Rowe Price Retirement funds. Retirement 2025 (TRRHX) is 60% US stocks, 20% international (including a sliver of emerging markets), 20% income (including slivers of commodities, junk, e.m. and international bonds).
For what it's worth,
David
1) You think of this investment task as initiating construction of a portfolio. Choice of fund should be subordinated to a plan for asset-allocation. See savingsforcollege.com for an overview of how different 529 plans approach the idea of age-based allocation. I suggest this not to steer you toward any particular model, but just as a prompt for your own thinking about what sort of allocation you want to choose now, and how you might like to change it over time.
2) Although saving for college is similar in some respects to saving for retirement, I think it is important to remember the differences (particularly if you choose to adapt a target date retirement fund for this purpose). To me, the major differences are that the timeframe for college savings is generally shorter, and then the spending period is much shorter. Both differences imply being more conservative with education money than you would be with retirement money.
3) I assume that you chose the Roth IRA approach over the 529 approach because you preferred flexibility about the ultimate use of the money, and about choice of investment vehicles. I have twice had to reclassify 529 money (once for unpleasant, and later for pleasant reasons), I believe this to be a canny choice. While it seems appealing to keep money in separate bins for separate purposes, many unexpected things can happen in 18 years. Unexpected events tend to occur life-wide; they don't respect the categories for money that our plans depend upon. It is humbling enough to have to change plans without also having to pay penalties.
Best of luck.
gfb
Your reply caught my eye.
Can we have open multiple 529 plans? I live in CA state. I thought I was eligible only to open 529 plan in CA state. I can't go and open 529 plan of other states. Because 529 plans are state plans. For example 529 plan of virginia can be opened by only virginia state residents. I found this a year ago.
htanks
nath
I live in Texas but invest but use West Virginia Smart529 Select Plan (smart529select.com). This is the only plan that incorporates funds from DFA Funds.
YES, but the limitation of $5K per year and foregoing one's part of a retirement plan would not be my personal preference. One may, if I recall the IRS info properly is that a 529 annual limit is $13,000K per year.
Your point, however; is well taken and good info.
Take care,
Catch
I live in Texas and I have two 529's; one in Utah and one in West Virginia.
- BY