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Author: kkch3n Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 201  
Subject: Invest $1500 now or wait for IRA/Car? Date: 7/21/2011 3:24 AM
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I'm 22 and I start my job in September.

After accounting for an emergency fund of $1500, I have $1500 left over. However, I will soon have to buy a car so that I can get to work. (My dad is going to pay for the car in full and I plan to get him back ASAP with interest) Also, I believe that I will finally have the option of opening an IRA once my job starts? (not quite sure about IRA requirements)

What I want to do is invest that $1500 (I'm thinking Teradata, Panera Bread, and BRK-B).

What do you think I should do with $1500? Thanks!
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Author: kkch3n Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194 of 201
Subject: Re: Invest $1500 now or wait for IRA/Car? Date: 7/21/2011 4:00 AM
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Oh, I'll be making around $50,000

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Author: kkch3n Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195 of 201
Subject: Re: Invest $1500 now or wait for IRA/Car? Date: 7/21/2011 4:02 AM
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...and I'll be living at home.

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Author: kkch3n Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196 of 201
Subject: Re: Invest $1500 now or wait for IRA/Car? Date: 7/21/2011 10:53 AM
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Some more details:
1) I do have student loans, but my dad has and will continue to cover college for all his kids.
2) I'm living at home (which is why I need the car). I'm planning on paying my fair share of the bills (although my dad doesn't really care).
3) I have got a couple thousand dollars bonus, which I'm keeping in savings. I have a Costco Interest Plus savings account (best rate that I've found). I also have 3 different checking accounts, BOA, Schwab, and Capital One. (Schwab is earning .5% interest).
4) The company is pulblic and health insurance and what not all all covered.
5) We're asian. I know too well about living below my means.
6) I've talked to my dad about his finances. He's near retirement age and doesn't seem to be able to afford a lot. There is debt. Nevertheless, he has told me that he'll have around $500,000 in the bank and he has a pension.
7) car is used - nevertheless I don't want to spend more than $10,000 on it. If I have to, I'll spend $14,000

Can I invest that $1500 still?

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197 of 201
Subject: Re: Invest $1500 now or wait for IRA/Car? Date: 7/21/2011 12:30 PM
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kkch3n,

You wrote, I'm 22 and I start my job in September.

After accounting for an emergency fund of $1500, I have $1500 left over. However, I will soon have to buy a car so that I can get to work. (My dad is going to pay for the car in full and I plan to get him back ASAP with interest) Also, I believe that I will finally have the option of opening an IRA once my job starts? (not quite sure about IRA requirements)

What I want to do is invest that $1500 (I'm thinking Teradata, Panera Bread, and BRK-B).

What do you think I should do with $1500? Thanks!


Well $1,500 isn't that much for an emergency fund; but I'll accept that since you'll be living at home. Bear in mind that a fully funded e-fund should be 3 to 6 months worth of living expenses; but even if you can live on less than $500/month, $1,500 won't cover many serious real-world emergencies.

Also if your employer offers a 401k, be sure to participate at least up to the match. And up to the limit if you can handle it. Better to get into the habit of setting money aside when you're young than wait until you are my age (46). Besides, any money you put into a 401k gets special tax treatment.

If you are covered by a retirement plan at work, the deduct-ability of a traditional IRA will be limited. Read here: http://www.irs.gov/retirement/article/0,,id=202510,00.html

Instead you'll probably have to use a Roth IRA. (A Roth IRA is probably best if you're just starting out in your career in any case.) With a $50K income, you won't be near the income cap. You can chose a broker or mutual fund company to hold your Roth IRA and contributions of up to $5,000/year. Anything you earn in that account will be tax-free and you can withdraw the original contributions at any time without penalty. You can even use it to hold your e-fund, not that I'd recommend it.

Finally, you can invest in whatever you like in a Roth IRA (not true in a 401k), however you should be careful about investing in too small an amount when buying individual securities. With small transactions, trading costs can quickly eat up any profits you generate. (I'll let others nit-pick your investment choices.)

- Joel

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Author: kkch3n Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 198 of 201
Subject: Re: Invest $1500 now or wait for IRA/Car? Date: 7/21/2011 3:11 PM
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Hi Joel,

I've done my best to understand IRAs, but...I don't get them sometimes.

What I thought was that I get a 401k and can denote that as a Roth or Tradiitional IRA? Or, can I get a 401k and a Roth?

Through the IRA, I could invest in stocks as I normally would through a brokerage? If that's the case, I might save most of my money until I start my job.

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199 of 201
Subject: Re: Invest $1500 now or wait for IRA/Car? Date: 7/21/2011 4:21 PM
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kkch3n,

You wrote, I've done my best to understand IRAs, but...I don't get them sometimes.

What I thought was that I get a 401k and can denote that as a Roth or Tradiitional IRA? Or, can I get a 401k and a Roth?


"Roth" and "Traditional" refer to the type of tax treatment applied to the account. The term 401k refers to the section of the tax code that creates special tax treatment for employer-sponsored, defined contribution plans - which is a type of pension plan. (Traditional pension plans are known as "defined benefit plans" and have become almost extinct in private business.) An IRA is defined in a separate section of the tax code and must be opened by an individual - thus the term "Individual Retirement Account".

Traditional and Roth IRAs are both possible. I have both. But the tax code limits how much you can contribute in a year and how much of those contributions might be tax deductible (in the case of a Traditional IRA). Traditional and Roth 401k employer-sponsored plans are also possible, but the availability of either is entirely up to your employer. Roth IRAs were available first, but Roth 401ks have been around for several years as well. Also Roth 401ks are becoming increasingly popular, so there is a good chance your employer may offer you that option.

There are benefits and problems with both types of IRA and 401k plans. The advantage of a Traditional plan (401k or IRA) is that you can reduce your tax burden for the current year. This means your taxable income will be reduced and your tax savings will be taken from the highest tax bracket you happen to be in. You pay taxes on this money in the year you withdraw it. Roth plans (401k and IRA) have the same contribution limits as Traditional plans, but you get to pay the taxes the year you make the contribution. This has the advantage that you might be able to "stuff" the account with an additional 25-33%. You owe no taxes on withdrawals from a Roth plan as long as you meet the restrictions on withdrawing earnings.

Whether to contribute to a Roth or Traditional plan depends in large part on what tax bracket you think you'll be in when you retire. Since that partly depends on Congress and partly on your investment performance, it's difficult to hazard an educated guess as to which is the right choice. However, contributing to a Roth is usually the smarter option in your earlier years because your tax bracket is likely to only rise from here.

Also, Through the IRA, I could invest in stocks as I normally would through a brokerage? If that's the case, I might save most of my money until I start my job.

An IRA is a type of account that infers special tax treatment under the US tax code. Lots of financial institutions offer them - banks, insurance companies, mutual fund companies and yes, stock brokers. If you want to buy stocks directly in your IRA account, you can do that - you just need to apply for an IRA with a broker. Almost every broker offers Traditional and Roth IRAs, so your primary selection criteria probably has to do with other things like transaction costs, maintenance fees and customer service. I would suggest you look for an online review of brokers to see what they say about those options. Also there is a TMF board on the topic as well - try asking opinions once you've narrowed down the selection a bit.

- Joel

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