New to investing. Should I open an IRA?

For reference, I'm 22 and self-employed, so no 401(k) or other employer-sponsored retirement plan for me. Every year at tax time, I think about contributing to a traditional IRA for the tax advantage and, of course, because I have $0 retirement savings.

I'm hoping for advice on whether or not that's a good idea.

I could comfortably contribute $2k for the 2020 tax year. If I don't, that money will go directly toward paying down my debt. I have $29,693 of $37,450 remaining. I plan to pay it all off this year and it's mostly CC debt. On one hand I figure it makes more sense to pay all this debt off. On the other, I feel like I should go ahead and start taking advantage of the tax incentive and the potential growth that money will see in the next year before the debt is paid off.

I am currently saving a chunk of every paycheck to build a cushy emergency fund, but most money is going toward debt payoff. Minimal "fun" spending. At my current rate, I'll be paid off by Dec 1 this year, and then my only remaining debt will be my big car loan. 

So, options...

  • Contribute to IRA now and continue paying down debt.
  • Don't contribute and put that money toward debt. 
  • Maybe invest that money or part of my savings somewhere else? 

Any input is so appreciated! :D

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  • This is a good question, especially at your age.  The time value of money earned from investing can be huge at 22 years old but the interest on 29K of credit card debt is also very high.  I'm not sure if this is the correct advice or not but I would probably do everything I could to get the debt paid off and commit to never getting in that situation again.  Once you get that paid down I would invest as much as I could in a Roth IRA every year, you should have a considerable monthly amount to go toward the max contribution since you have been paying a lot toward debt.  The reason I would select a Roth instead of traditional IRA at your age is that money will grow tax free for life and you are already used to paying the tax on it now.  I would also invest that money in a company like vanguard and choose 100% stocks (index funds preferably).

    Check out a book called The Simple Path to Wealth by JL Collins, he has excellent investment advice.

    Like 3
      • Pineapple Gal
      • Goal-Getter
      • Orchid_Wrench.11
      • 2 mths ago
      • 1
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      ynaber2613 said:
      I'm not sure if this is the correct advice or not but I would probably do everything I could to get the debt paid off and commit to never getting in that situation again.

       I've definitely made that commitment! I stopped using these cards almost a year ago now and I began vigorously paying them down in January when an income increase allowed me to start making substantial progress. 

      I will look for that book. I have been back and forth between Roth and Traditional. I obliviously like that traditional gives me tax savings now. I have no idea what my tax bracket will be once I hit 59 1/2, and it feels like so far off with so many variables between now and then, that paying taxes on the money now seems less than favorable. I will spend the next year comparing those options and plan to make an investment for tax year 2021. 

      I appreciate your input! 

      Like 1
      • ynaber2613
      • ynaber2613
      • 2 mths ago
      • Reported - view

      Pineapple Gal Please take this year to study the pros/cons of Roth vs Traditional.  There are other advantages to a Roth other than growing tax free.  You are not required to take required minimum distributions at 72 and your children can inherit the Roth tax free as well, at least as the law is currently written.  Good luck.

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      • casner
      • Now retired, and figuring out transitions
      • casner
      • 2 mths ago
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      • Reported - view

      ynaber2613 Second the advice on Roth. As someone who only used IRAs and 401k for the last 45 years, I wish I had put some of that into Roth. When it comes to retirement time, the vast majority of your money should be from income on the investment either way, and with Roth that is tax free.

      Like 1
  • Just an FYI, some who is self employed with no employees can open and contribute to a Solo 401k.

    Like 3
      • Pineapple Gal
      • Goal-Getter
      • Orchid_Wrench.11
      • 2 mths ago
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      • Reported - view

      nolesrule Thanks! I have heard this, but have yet to look more closely at the benefits of a solo 401k for my situation. I will spend the year diving into the investment account options I have to see what will work best for my future plans. 

      Like 1
    • Melissa
    • Routinely questioning every assumption I have about my budget, my spending, and my savings habits.
    • todays_mel
    • 2 mths ago
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    I agree that focusing your extra money towards that debt is likely the best option for your particular scenario, especially considering your age. And since you've planned on knocking out your debt this year, you aren't losing much time by postponing retirement contributions until then.

    You can open both a Traditional and Roth IRA; doesn't have to be one or the other. You simply can't contribute more than the yearly limit for all your IRA accounts combined (max $6000 for 2020, same for 2021).

    Your current tax bracket, and what you think your tax bracket at retirement age will be, should be considered for which type of IRA you contribute to; or how much to contribute to each in a given year.  You also need to consider your total yearly income as there's a ceiling on earned income for contributing to Roth IRAs, which is why I recommend having both IRA types open. 

    If you expect to be in a much higher tax bracket at retirement than for the better part of your working years, Roth would be a better fit. If you expect to be around the same or lower bracket in retirement as now, then Traditional is likely to be the better option to get the immediate tax benefits. Your tax bracket will fluctuate over your working years, so this is a guide not a hard rule.

    I also suggest investing at/in Vanguard as they have some of the best funds/returns anywhere and lowest fees in the business.  You can open Traditional, Roth, and the self-employed type of accounts with them, and/or just open a taxable investing account. Lots of options. I've heard Schwab is also good, but I have no personal experience with them. (Disclosure: I hold accounts with Edward Jones, and Vanguard for my retirement contributions).

    JL Collins has great advice on investing; he's got a whole Stock Series of blog posts, in addition to the book referenced above. Wish I'd discovered him 20 years ago!

    You're at the perfect age to start learning and investing, as you got so many years to contribute and build your retirement funds and fiddle around with things. Don't worry about trying to get things perfect out of the gate, but do educate yourself as much as possible and tweak things as you go. Just know that some of this is a guessing game. Paying someone reputable for sound financial advice is highly recommended.

    Like 2
  • Melissa said:
    If you expect to be in a much higher tax bracket at retirement than for the better part of your working years, Roth would be a better fit. If you expect to be around the same or lower bracket in retirement as now, then Traditional is likely to be the better option to get the immediate tax benefits. Your tax bracket will fluctuate over your working years, so this is a guide not a hard rule.

    One thing I failed to mention is that my tax bracket for 2020 is going to be lower than my tax bracket for 2021, which is why I was considering putting some money into an IRA. Does it then make since to do a Roth IRA contribution before May 17?

    As far as long-term, I'm thinking a traditional IRA makes more sense. I'd like to think my income will continue to increase, but at the moment I have no reason to believe I'd be in a higher tax bracket at retirement than I will be this coming tax year.

    Thanks for all of your input! 

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      • Melissa
      • Routinely questioning every assumption I have about my budget, my spending, and my savings habits.
      • todays_mel
      • 2 mths ago
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      Hi Pineapple Gal

      I can't answer specific questions about how much better it will be for your's (or anyone's) tax situation to fund the Roth; you'll need a tax professional to lay that out. And also that's a can of worms I'm not comfortable opening because it crosses the line from suggestions to "here, do this because I say so". 

      I still highly recommend you take the rest of the year to focus on paying off the debt first, while also using that time educating yourself about the types of retirement accounts available to you and how those will best suit your needs before actively investing. This is of course my personal opinion (and I hope it doesn't come across as condescending because that's the opposite from my intention!). 

      You're likely itching to get a jump on funding retirement, and the enthusiasm is understandable and commendable. Because I had no one explain how important it is to set up a retirement account (and didn't open an IRA until my mid-30's), I'm happy to see that you're taking it seriously. Sitting down (or remotely working) with a paid/reputable advisor in your area to help explain different investing options and what your particular goals/expectations/assumptions are for retirement is extremely important. The more upfront work/research you do now (and there are also lots of online education available at your fingertips too) will help you tremendously in the long term.

      Like 2
      • Pineapple Gal
      • Goal-Getter
      • Orchid_Wrench.11
      • 2 mths ago
      • Reported - view

      Melissa Thank you for the recommendations! I appreciate all the points of view this forum offers. I think I will make a plan to speak to an advisor later this year, and continue focusing on paying down my debt. 

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  • My gut reaction is to get rid of the credit cards and anything costing you more than somewhere in the 5-10% range before worrying about the IRA.  (I prefer the Roth flavor because the same number of Roth dollars is worth way more than the same number of traditional dollars come retirement.)  This advice is ONLY valid if you’re 100% committed to keeping the debt gone though.  If you think you won’t be able to keep that commitment, go ahead and start the retirement savings.

    Every year you delay your retirement savings does terrible things to your future retirement fund value, so delaying is obviously a less than optimal decision, but if your credit cards are like mine and charger 19.5-23%, you’re probably losing money if you put the money into a retirement fund.  I can’t promise we won’t have an insanely good stock year, but the statistics say it averages 9.xx%.


     In the end, my advice is to take the money you’re currently thinking about putting on retirement and instead use it to beat the stuffing out of the CCs that much faster.  If you get them nailed by the end of the year like you’re planning, you can then take that entire amount and see how much you can cram into an IRA as 2021 contributions by the April 15, 2022 deadline.

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