18 year old making $60k a year; how should I invest? Traditional or Roth IRA?
"1) Usually, the choice between Traditional vs. Roth is whether you believe that your tax rate will be higher or lower in the future than it is now. Your income is probably in the 25% bracket now. It's hard to say whether that should be considered ""high"" or ""low"". Some people advocate Roth only for 15% bracket; but your income would probably go into higher brackets in the future, so Roth may be preferable from this point of view. Roth IRA also has another advantage that the principal of contributions can be taken out at any time without tax or penalty, so it can serve as an emergency fund just as well as money in taxable accounts. Given that you may not have a lot of money saved up right now, this is useful. 2) In a sense, it's nice to have a mix of Traditional and Roth when you withdraw to hedge against uncertainty in future tax rates and have the option of choosing whichever one is advantageous to withdraw when you need to withdraw. That said, you will likely have many years of access to a 401k and high income in your future working years, in which you can contribute to a Traditional 401k (or if no access to 401k, then Traditional IRA), so a mix will almost certainly happen even if you go all Roth IRA now. 3) I think that depends on you, whether you are a hands-on or hands-off kind of investor." With this level of income, you might consider a Solo 401(k). It would allow you a much higher level of contributions and is more appropriate for your savings than the limited IRA deposits. It also offers a considerable number of options not available for IRAs. A loan for example. "In asnwer to your questions: As @joetaxpayer said, you really should look into a Solo 401(k). In 2017, this allows you to contribute up to $18k/year and your employer (the LLC) to contribute more, up to $54k/year total (subject to IRS rules). 401(k) usually have ROTH and traditional sides, just like IRA. I believe the employer-contributed funds also see less tax burden for both you and your LLC that if that same money had become salary (payroll taxes, etc.). You might start at irs.gov/retirement-plans/one-participant-401k-plans and go from there. ROTH vs. pre-tax: You can mix and match within years and between years. Figure out what income you want to have when you retire. Any year you expect to pay lower taxes (low income, kids, deductions, etc.), make ROTH contributions. Any year you expect high taxes (bonus, high wage, taxable capital gains, etc.), make pre-tax payments. I have had a uniformly bad experience with target date funds across multiple 401(k) plans from multiple plan adminstrators. They just don't perform well (a common problem with almost any actively managed fund). You probably don't want to deal with individual stocks in your retirement accounts, so rather pick passively managed index funds that track various markets segments you care about and just sit on them. For example, your high-risk money might be in fast-growing but volatile industries (e.g. tech, aerospace, medical), your medium-risk money might go in ""total market"" or S&P 500 index funds, and your low-risk money might go in treasury notes and bonds. The breakdown is up to you, but as an 18 year old you have a ~50 year horizon and so can afford to wait out anything short of another Great Depression (and maybe even that). So you'd want generally you want more or your money in the high-risk high-return  category, rebalancing to lower risk investments as you age. Diversifying into real estate, foreign investments, etc. might also make sense but I'm no expert on those."
529 College Savings Plans exist, which allow for tax-free savings for educational expenses, but I think you expect to go back to school too quickly for them to be worth the hassle. (They're more designed for saving for college for your kids.) Other than an IRA, you don't have many options for tax-advantaged accounts. In addition, since you plan to return to school, you should keep money around for that. Don't put that money in anything too volatile or hard to access. Since you don't plan on doing anything with the 80k in CDs right now, you can get away with higher risk with that money. I think others have made the key points. Let me just add: As others have pointed out, the traditional IRA is better if your tax rate in retirement is lower than it is when you are building the account. The Roth IRA is better if your tax rate in retirement is higher. For most people, your income in retirement will be lower than your income in most of your working years. On top of that, a significant percentage of your income will come from Social Security, which is generally not taxed, and so the tax rate you pay on the remaining income will be lower still. If you're just starting out, if you're in your 20s, it's likely that your income will go up significantly in the next couple of decades and so you might be making more in retirement that you are now, and so the Roth is probably your better bet. But if you're in your 40s or 50s you are probably making your peak income, you will have much less in retirement, and the traditional IRA is likely better. If your income is well above average and you are saving enough to have a retirement income well above average, then social security may be a very small part of your retirement and my comments on that may not be relevant to you. It's true that tax rates could change in the future. But will they go up or down? It's also possible that the laws about retirement accounts will change. If you think you have some insight into what will happen in the future you may want to take that into account when making plans. But politics is very hard to predict. Other people have pointed this out, but there are a few considerations in whether you should do a Roth or Traditional IRA, such as: One of the major arguments for using a Traditional IRA is that you can (at least in theory) afford to contribute more money initially than you'd be able to afford if you were using a Roth IRA. While this is, in theory, true, I'm not at all convinced that using a Traditional IRA will actually cause people to contribute more to it. Realistically, how many people will actually contribute, say, $500 more to their IRA because they knew that their contribution for this year will save them $500? To know if this is the case, consider the last time that you actually invested some of your tax refund in your retirement account; I haven't seen any actual statistics on this, but I'm guessing that very few people do this. Please see other people's answers for details on the mathematics behind that. The second argument for contributing to a Traditional IRA is if you expect your future income tax rate to be lower than your current tax rate for some reason - e.g. due to a change in government policy (e.g. replacing income taxes with Value Added Tax or something like that), the fact that you're doing the contribution relatively close to when you're planning on withdrawing it, etc. Please see this question for more discussion about this. Keep in mind that, while a Traditional IRA saves you tax money this year, a Roth IRA saves you money when you withdraw it, so it's not really a question of paying taxes on $5000 now or $5000 later, it's a question of paying taxes on $5000 now vs., for example, $50,000 later (or however much the money's grown by the time you withdraw it). Maybe the Traditional IRA is still worth it, though, if there are changes to tax policy or you end up with a lot more money in your Traditional IRA due to being able to contribute more. For a young person with good income, 50k sitting in a savings account earning nothing is really bad. You're losing money because of inflation, and losing on the growth potential of investing. Please rethink your aversion to retirement accounts. You will make more money in the long run through lower taxes by taking advantage of these accounts. At a minimum, make a Roth IRA contribution every year and max it out ($5500/yr right now). Time is of the essence! You have until April 15th to make your 2014 contribution! Equities (stocks) do very well in the long run. If you don't want to actively manage your portfolio, there is nothing wrong (and you could do a lot worse) than simply investing in a low-fee S&P 500 index fund. "Since your 401k/IRA are maxed out and you don't need a 529 for kids, the next step is a plain ol' ""Taxable account."" The easiest and most hassle-free would be automatic contributions into a Mutual Fund.  Building on poolie's answer, I think mutual funds are much more automatic/hassle-free than ETFs, so in your case (and with your savings rate), just invest in the Investor (or Admiral) shares of VEU and VTI. Other hassle-free options include I-Bonds ($5k/year), and 5-year CDs." Something that's come up in comments and been alluded to in answers, but not explicit as far as I can tell: Even if your marginal tax rate now were equal to your marginal tax rate in retirement, or even lower, a traditional IRA may have advantages.  That's because it's your effective tax rate that matters on withdrawls. (Based on TY 2014, single person, but applies at higher numbers for other arrangements): You pay 0 taxes on the first $6200 of income, and then pay 10% on the next $9075, then 15% on $27825, then 25% on the total amount over that up to $89530, etc.  As such, even if your marginal rate is 25% (say you earn $80k), your effective rate is much less: for example, $80k income, you pay taxes on $73800.  That ends up being $14,600, for an effective rate in total of 17.9%. Let's say you had the same salary, $80k, from 20 to 65, and for 45 years saved up 10k a year, plus earned enough returns to pay you out $80k a year in retirement.  In a Roth, you pay 25% on all $10k.  In a traditional, you save that $2500 a year (because it comes off the top, the amount over $36900), and then pay 17.9% during retirement (your effective tax rate, because it's the amount in total that matters).   So for Roth you had 7500*(returns), while for Traditional the correct amount isn't 10k*(returns)*0.75, but 10k*(returns)*0.821.  You make the difference between .75 and .82 back even with the identical income.  [Of course, if your $10k would take you down a marginal bracket, then it also has an 'effective' tax rate of something between the two rates.] Thus, Roth makes sense if you expect your effective tax rate to be higher in retirement than it is now.  This is very possible, still, because for people like me with a mortgage, high property taxes, two kids, and student loans, my marginal tax rate is pretty low - even with a reasonably nice salary I still pay 15% on the stuff that's heading into my IRA.  (Sadly, my employer has only a traditional 401k, but they also contribute to it without requiring a match so I won't complain too much.)  Since I expect my eventual tax rate to be in that 18-20% at a minimum, I'd benefit from a Roth IRA right now. This matters more for people in the middle brackets - earning high 5 figure salaries as individuals or low 6 figure as a couple - because the big difference is relevant when a large percentage of your income is in the 15% and below brackets.  If you're earning $200k, then so much of your income is taxed at 28-33% it doesn't make nearly as much of a difference, and odds are you can play various tricks when you're retiring to avoid having as high of a tax rate. "This may be more of a comment than an answer, but it's too long for a comment. Perhaps the Stackexchange Gods will forgive my impudence. That said: Even with the tax penalties, it can be to your advantage to put money into a ""retirement"" account and withdraw it before retirement. The trick is: Is the amount of the tax penalty more than the benefit of untaxed compound growth? For example, just to make up some numbers: Suppose you have $1000 of gross income to invest. You are considering whether to invest in an ordinary, non-tax favored account, or a classic IRA. Either way you will get 10% returns. Your tax rate, both when you put the money in and when you take it out, is 15%. There is a 10% tax penalty for early withdrawal. With an ordinary account you will pay 15% tax off the top, so you are only investing $850. Then each year 15% of your returns are paid in taxes, so your net return is 8.5%. But when you withdraw the money there are no additional taxes. With an IRA you do not pay any taxes up front, so you can invest the entire $1000. You collect 10% each year with no taxes. When you withdraw, you pay 15% plus the 10% penalty equals 25%. So after 5 years, the ordinary account would yield $850 x 1.085^5 = $1504. The IRA would yield $1000 x 1.1^5 x 0.75 = $1208. The tax penalty hurts. You are better to use the ordinary account. But if you could leave your money in for 25 years, then the ordinary account would yield $850 x 1.085^25 = $7687. The IRA would yield $1000 x 1.1^25 x 0.75 = $8126. The IRA, even with the tax penalty, is better. Of course my numbers are just made up. What your tax bracket is, what returns you get, and how long you think you might leave the money in the investment, all vary." "This is an excellent topic as it impacts so many in so many different ways. Here are some thoughts on how the accounts are used which is almost as important as the as calculating the income or tax. The Roth is the best bang for the buck, once you have taken full advantage of employer matched 401K.  Yes, you pay taxes upfront.  All income earned isn't taxed (under current tax rules).  This money can be passed on to family and can continue forever.  Contributions can be funded past age 70.5.  Once account is active for over 5 years, contributions can be withdrawn and used (ie: house down payment, college, medical bills), without any penalties.  All income earned must be left in the account to avoid penalties.  For younger workers, without an employer match this is idea given the income tax savings over the longer term and they are most likely in the lowest tax bracket. The 401k is great for retirement, which is made better if employer matches contributions.  This is like getting paid for retirement saving.  These funds are ""locked"" up until age 59.5, with exceptions.  All contributed funds and all earnings are ""untaxed"" until withdrawn. The idea here is that at the time contributions are added, you are at a higher tax rate then when you expect to withdrawn funds. Trade Accounts, investments, as stated before are the used of taxed dollars.  The biggest advantage of these are the liquidity." Is investing in a Roth retirement account only better if you will be in a higher    tax bracket in retirement? If you are pushing up against the contribution limits, a Roth account may allow you to save more money in tax-advantaged accounts. In your example, you are putting $100 pre-tax in a traditional account vs $85 post-tax in a Roth account. But if there are limits, and the limits are the same for traditional or Roth accounts (as they currently are for US 401(k) accounts), you can effectively put more into a Roth account, where the limit applies to the post-tax amount, than a traditional account, where the limit applies to the pre-tax amount. If so, is there any case in which a traditional retirement account is better than a Roth account? It is smart to have some money in a traditional account, because the first amount of money you earn or withdraw each year (up to the standard deduction) is taxed at 0%, which is probably less than your current rate. And the next bit of money is taxed at only 10%, which may also be less than your current marginal rate. Of course, things may change by the time you retire, but it is probably safe to assume that we will still have some kind of progressive (income bracketed) tax structure. While the other answers are good, I wanted to expand a little on why I feel a ROTH is a bad way to go unless you are young. First, let's pretend you have a 25% tax rate. And your investments will go up 5% per year for 10 years. You contribute 6% of income for one year. You can do a traditional or a roth 401k/IRA. Here's the math: Traditional: 6% of income invested. Grows at 5% for 10 years. Taxed at 25% on withdrawl. = (Income * 6%) * (1.05 ^ 10) * (100% - 25%) = (Income * 6%) * 1.63 * .75 = 7.33% of your original income - but this is after taxes ROTH: Taxes taken out of income. Then 6% of that goes into the fund(s). Still grows at 5% for 10 years. Not taxed at withdrawl. = (Income * (100% - 25%) * 6%) * (1.05 ^ 10) = (Income * 75% * 6%) * 1.63 = 7.33% of your original income - again this is after taxes. Look familiar? They are the same. It's the simple transitive property of mathematics. So why do a traditional vs. a ROTH? The reason is that your tax bracket changes. This changes because your income changes. Say when you retire you plan to have your home or vehicle paid for. You expect to be able to live on $50,000 per year. This means when you make MORE than $50,000 you should do a traditional plan and when you make less than this you should do a ROTH plan. Example: You make $100,000 and your upper bracket is now 30%. You save 30% by doing a traditional and then pay back 10, 20, and 30% as you withdraw a salary of $50,000. Traditional = better. Example: You make $30,000 annually. Your upper bracket is 20%. You pay 20% on a roth. Then you withdraw funds to get to $50,000 anually and never pay the higher bracket. Roth = better. ROTH advocates typically bring up tax rates. Of course they will go up they insist. So you always should do a ROTH. Not so fast. Taxes have gone down in recent years (No one please start a political debate with me. Some went up, some went down, but overall, federal income rates dropped). Even if taxes rose 5%, a traditional will still be better than a ROTH in many cases. Both types of plans offer a tax benefit.  A traditional IRA allows you to invest pre-tax money into the account and it grows tax free. Once you withdraw the money it then gets taxed as though it were income based on the amount you withdraw for that calendar year. A Roth IRA has you invest post-tax money and also grows tax free. However, when you make withdraws in retirement that money is then tax free.  Neither plan is right for everybody. If you have a very high income now and plan on being in a smaller tax bracket later when you'll be making withdraws then the traditional IRA is better. If you will be in a higher bracket later, then the Roth IRA will serve you more. Depending on the way you manage your retirement investing you can likely invest in both if you are unsure as to which would be better. The same type of investments should be able to be nested within each type. "I don't think the advice to take lots more risk when young makes so much sense. The additional returns from loading up on stocks are overblown; and the rocky road from owning 75-100% stocks will almost certainly mess you up and make you lose money. Everyone thinks they're different, but none of us are. One big advantage of stocks over bonds is tax efficiency only if you buy index funds and don't ever sell them. But this does not matter in a retirement account, and outside a retirement account you can use tax-exempt bonds. Stocks have higher returns in theory but to have a reasonable guarantee of higher returns from them, you need around a 30-year horizon. That is a long, long time. Psychologically, a 60/40 stocks/bonds portfolio, or something with similar risk mixing in a few more alternative assets like Swenson's, is SO MUCH better. With 100% stocks you can spend 10 or 15 years saving money and your investment returns may get you nowhere. Think what that does to your motivation to save. (And how much you save is way more important than what you invest in.) The same doesn't happen with a balanced portfolio. With a balanced portfolio you get reasonably steady progress. You can still have a down year, but you're a lot less likely to have a down decade or even a down few years. You save steadily and your balance goes up fairly steadily. The way humans really work, this is so important. For the same kind of reason, I think it's great to buy one fund that has both stocks and bonds in there. This forces you to view the thing as a whole instead of wrongly looking at the individual asset class ""buckets."" And it also means rebalancing will happen automatically, without having to remember to do it, which you won't. Or if you remember you won't do it when you should, because stocks are doing so well, or some other rationalization. Speaking of rebalancing, that's where a lot of the steady, predictable returns come from if you have a nice balanced portfolio. You can make money over time even if both asset classes end up going nowhere, as long as they bounce around somewhat independently, so you'll buy low and sell high when you rebalance. To me the ideal is an all-in-one fund that aims for about 60/40 stocks/bonds level of risk, somewhat more diversified than stocks/bonds is great (international stock, commodities, high yield, REIT, etc.). You can just buy that at age 20 and keep it until you retire. In beautiful ideal-world economic theory, buy 90% stocks when young. Real world with human brain involved: I love balanced funds. The steady gains are such a mental win. The ""target retirement"" funds are not a bad option, but if you buy the matching year for your age, I personally wish they had less in stocks. If you want to read more on the ""equity premium"" (how much more you make from owning stocks) here are a couple of posts on it from a blog I like: Update: I wrote this up more comprehensively on my blog," "I'm going to discuss this, in general, as specific investment advice isn't allowed here. What type of account is the $60K in now? I mean - Is it in a 401(k), IRA or regular account/CD/money market?  You are still working? Does your company offer any kind of matched 401(k)? If so, take advantage of that right up the level they'll match. If not, are you currently depositing to pretax IRAs? You can't just deposit that $60K into an IRA if it isn't already, but you can put $11k/yr ($5 for you, $6K for hubby if you make $11K or more this year.) Now, disclaimer, I am anti-annuity. Like many who are pro or con on issues, this is my nature. The one type of annuity I actually like is the Immediate Annuity. The link is not for an end company, it shows quotes from many and is meant as an example. Today, a 65 yr old man can get $600/mo with a $100K purchase. This is 7.2%, in an economy in which rates are sub 3%. You give up principal in exchange for this higher annual return.  This is a viable solution for the just-retired person whose money will run out when looking at a 4-5% withdrawal but 1% CD rate. In general, these products are no more complex that what I just described, unlike annuities sold to younger fold which combine high fees with returns that are so complex to describe that most agents can't keep their story straight.  Aside from the immediate flavor, all other annuities are partial sold (there's a quote among finance folk - ""annuities are sold, not bought"") based on their tax deferral features. I don't suspect you are in a tax bracket where that feature has any value to you.  At 48/54, with at least 10 years ahead of you, I'd research 'diversification' and 'asset allocation'. Even $60K is enough to proper invest these funds until you retire and then decide what's right for you.   Beginners' Guide to Asset Allocation, Diversification, and Rebalancing is an interesting introduction, and it's written by the SEC, so your tax dollars paid for it.  Some months ago, I wrote Diversifying to Reduce Risk, which falls short of a complete discussion of asset allocation, but it does illustrate the power of being in a stock/bond mix. The ups and downs were reduced significantly compared to the all stock portfolio.  (for follow up or to help others reply to you, a bit more detail on the current investments, and how you are devastated, eg was there a huge loss from what you had a few years ago?) Edit - The original poster hasn't returned. Posted the question and left. It's unfortunate as this was someone who would benefit from the dialog, and the answers here can help others in a similar position, but I feel more discussion is in order for the OP. Last, I caught a downvote on my reply today. I take no offense, but curious which part of my answer the DVer disagreed with." I recommend saving for retirement first to leverage compound interest over a long time horizon. The historical real return on the stock market has been about 7%.  Assuming returns stay at 7% in the future (big assumption, but don't have any better numbers to go off of), then $8,000 saved today will be worth $119,795 in 40 years (1.07^40*8000).  Having a sizable retirement portfolio will give you peace of mind as you progress through life and make other expenditures. If you buy assets that pay you money and appreciate, you will be in a better financial position than if you buy assets that require significant cash outflows (i.e. property taxes, interest you pay to the bank, etc.) or assets that ultimately depreciate to zero (a car).  As a young person, you are well positioned to pay yourself (not the bank or the car dealership) and leverage compound interest over a long time horizon. $4,000 is a relatively small amount in the grand scheme of retirement. I think you should decide in general whether a Traditional or Roth makes more sense for you (with the intent that you will continue contributing to it in the future), and then treat the $4,000 like you would any other contribution.