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For a Roth IRA, I believe one can withdraw deposited monies (not gains) after five years. I want to recommend to a young family member of mine to start a Roth so at the very least the person can get the five-year wait out of the way (the family is reluctant to have him start investing at his age - I have no idea why, it continues to be a struggle to get him going in that area). I want to say just deposit a small amount, even $100, and then five years from now, you can take out whatever you deposited if you have regrets.

I just want to be sure that is still correct and nothing has changed with the law. Also, the five-year thing doesn't reset every year I assume? In other words, $100 deposited in year 4 doesn't need another five years to be clear, correct?

I think it was a Fool article years ago that mentioned a Roth could almost be used as a short-term emergency fund (again, no gains taken out), and I want to use that aspect to sell it to him. My hope is once it is established, an investing fever will take over. In today's age, with no-minimum balance and no commission, it is too good an opportunity to pass up.
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You are correct, but if this young person wants to start a Roth IRA, it should be with the intent of long term investing for their retirement. Withdrawing your original gains should be a last back-against-the-wall option, because the power of a Roth is in it's long term growth value.

I would encourage any young person who is interested in saving for their retirement to first claim any company-matching contributions from their employer's 401k, and then funding a Roth IRA to the full extent they are able.

If $100 invested today grew at a 6% rate, it would be worth $134 in 5 years. If you invested $100/yr for 5 years at that growth rate, it would be worth $698. If you could swing $500/yr for 5 years, at 6% growth, it would be worth $3,488. If you started out at $100 and then added $50/mo for 5 years, it would grow to $3,623.

One thing parents or a relative could offer is to match the young person's first year contributions to kick start their savings habit. It's a bit of generosity that will probably go underappreciated until financial maturity sets in, but you're right - today's commission-free investing environment presents opportunities.

Fuskie
Who notes the plan should never be to take the money out after the initial 5 years but to do everything possible to continue building the Roth IRA and not take distributions until reaching retirement age...

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Hi esxokm,

To add to what Fuskie said.

While encouraging your family member to start investing for retirement is awesome. You don't really want him/her to think of his/her IRA as an emergency fund or source of cash. Otherwise, they won't have what they need when they do get to retirement age.

If your family member doesn't have an emergency fund, that should be their first priority.

After that, yes, starting with $100 is fine. There is a great RBI podcast about a fellow who was in the military. His commander had encouraged him and his fellows to save $100 or so over the first couple years of their service. And, then continue saving a percentage of their pay increases over time. By the time he was in his 40's (?) he was saving 40% of his income and was in a great position to retire when the time came. Maybe someone knows the url for that podcast.

Perhaps you could provide matching funds. Say your family member deposits $50 and you match it as a place to start.

Vicki
Fool One Guide
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Thanks to all who replied with advice and with the Goog/Schwab links. I have gone over it all.

I will use all this when I try my next sell-session on investing. It's good to perhaps not emphasize the emergency-fund aspect, you're right, I don't want it to be looked at that way, so great advice on that.

I will also try the matching idea. I will try to get others involved in it as well.

And I did not think about having him focus on first establishing an emergency fund on its own. He has savings, but needs some of that I believe for college.

I wish he had started years ago, when he was very young, but that time is gone.

Thanks again for the info...
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If your young relative is not yet out of college, he is still plenty young enough. Young folks don't make a lot of income, so it is a great time to establish a Roth as the taxes paid are almost certainly going to be less than those he will owe during retirement.

My 19 year old daughter opened her first Roth IRA at the end of summer with earnings from her first summer job. When she is home at Christmas we will talk about what companies she wants to invest her $$s in. Luckily this daughter is interested in investing.

Vicki
Fool One Guide
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If he's still in college, he doesn't need an eFund yet - he should focus on his college needs. And I should point out that contributions to a Roth IRA have to be based on earned income up to $5,500 (the max contribution for those under 50 in 2019/2020), so the young man needs to earn at last that amount in order to fully fund a Roth IRA. In the example you gave, he would have to have earned at least $100 to contribute $100.

Fuskie
Who notes, however, that while he has to earn the income, the contributions can be sourced all or in part as a gift from you or someone else...

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Disclaimer: This post is non-professional and should not be construed as direct, individual or accurate advice
Disclosure: May own shares of some, many or all of the companies mentioned in this post (tinyurl.com/FuskieDisclosure)
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Glad to hear agreement on it not being too late. I was kind of hoping the folks would have started investing on his behalf and started the discussion then before high school was out, but I guess there is indeed time based on consensus. (I think the magic number is putting money away in the market at 15...imagine what just the initial investment becomes at 65, in theory at least, a whole half-century later, right at traditional retirement age; of course, it would take a lot, a lot, of discipline not to touch it; managing it is certainly okay, but withdrawals, that would be tough, I concede.)

Thanks for reminding me about the income requirement...slipped my mind and became nonexistent. That is a good idea about sourcing to gifts.

TMF-V, you are fortunate indeed she wants to invest. Very smart thing to do. With the Fool on your side, she will do extremely well over time. You say first Roth...I hear people saying this sometimes (more so in terms of "this year's Roth"). I've always just stayed at one broker, do you mean that people tend to open Roths at different brokers/fund companies over time? I knew someone who did that, but figured that was rare. Mine is the same broker for years.
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Hi esxokm,

I guess I should have said first contribution to a Roth.

She opened her first brokerage account a year ago before she went off to college. She had pretty much saved all her gift money, babysitting money, cat sitting money that she had ever received, and so the account was all hers.

She also has a UGTM account (aka college money) that will become hers when she is 25.

Vicki
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She also has a UGTM account (aka college money) that will become hers when she is 25.

I set up a UGMA account for a friend of mine when she was a few months old, but I was the custodian (not her parents) because I was the only person putting money into it. Now in New Jersey, I would have been required to turn the whole thing over to her when she became 21. At my discretion, I could have money withdrawn at any time for her benefit. And when she got old enough to go to college, I took money out for tuition, books, dorm rent, etc. Since these expenses went up faster than I could contribute, even though I more than doubled the investment, there was only enough for a little more than two years of college. But she is the first person in that extended family to ever go to college. She has now graduated, and has a job teaching second grade in the same school that she went to when she was in second grade.

It is my understanding that UGMA accounts must be turned over to the beneficiary when they become either 18 or 21, depending on the state. 25 seems a bit old. But I have by no means kept up with accounts like this, and certainly not in other states than the one I live in.
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California let me set the date for my kids at 25. Since they were infants when I set them up I had no idea how they would turn out. As an older mom, I wanted to make sure my kids could go to college, and grad school, no matter what.

As an aside, my oldest started college two weeks before her 18th birthday, so even her account had to be setup as a UGMA-18 account and then we fixed it to be hers when she came home for a break. These accounts go into a kind of limbo three months after they "age out".

Congrats to your young friend and to you for helping her.

Vicki
Fool One Guide
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California let me set the date for my kids at 25. Since they were infants when I set them up I had no idea how they would turn out. As an older mom, I wanted to make sure my kids could go to college, and grad school, no matter what.

I wanted to do two things in my case. The parents of that little girl (now grown-up) were incapable of even trying to make a budget, much less following one. They spend money a little faster than it comes in. For example, they have no equity in their house because they borrowed it out to replace a roof one time, an oven another time. They lease their cars instead of buying them because the monthly payments are less that way. I guess they expect to live on social security alone. They have no savings.

I wanted to show them the power of compound interest, and such things, so I set up that account. There was a very good school here, then known as Trenton State. I looked up their tuition at the time, allowed some inflation rate (higher than the government quoted rate), assumed I could make 15% to 18% a year (possible in those days). Based on that, I figured I could put around $850/year in there and she would have enough for four years in college. I later increased that to $1000/year when my investment results went down. Remember Oxford Health Plans?

And I failed both ways. First, it stopped being easy to make that kind of money every year, and the college tuition inflation rate became much greater than I allowed for. Also, later I could no longer make those contributions (after my employer got rid of 14,000 employees, and I was one of them). But over the years, the amount I contributed amounted to around $20,000 and the account ran up to about $45,000.

Second, my friends learned nothing for my example.

As an aside, my oldest started college two weeks before her 18th birthday, so even her account had to be setup as a UGMA-18 account and then we fixed it to be hers when she came home for a break. These accounts go into a kind of limbo three months after they "age out".

I guess the UGMA I set up had different rules. My friend went to college a bit before she was 18 (Born October 10), but as custodian, I could write checks on her account provided they were for her benefit. So they were mainly payable to the college or the the college bookstore. I did not have to change anything to get her money even though she was under 21.

Congrats to your young friend and to you for helping her.

She did the work. All I did was provide about half the money.
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It is unfortunate that your friends (the parents) didn't learn anything from the experience. But, hopefully the daughter did. Clearly she worked hard as she got into school and graduated as the first in her family.

Sorry about the confusion. The UGMA-18 was the new account with my daughter's babysitting and gift money. She wanted that in a separate account that was just her contributions. I am able to write checks out of the UGMA-25 account for tuition and such.

She did the work. All I did was provide about half the money.

It takes a community. You did good. You made a difference in the world. Hopefully the young woman has learned a lesson about saving for the future and will put away some of her own nickles for her future retirement.

Vicki
Fool One Guide
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