Good day to all, my daughter is finally going to start an IRA(she finally got a full time job after graduating from college). Unfortunately, her company tells her she needs to wait 1 yr before 401k contributions can occur so I thought that the IRA would be the best alternative. My understanding is she can contribute to a traditional IRA for $4k(to get the tax deduction) and then convert to a Roth for the tax free opportunities upon withdrawals in the future(sound advice I hope)? My questions are as follows:

1) How soon can you convert from the traditional to the roth(can this be an immediate pass-thru?(she is planning on monthly contributions not a lump sum since she's just starting out).
2) If she needs to touch the money, isn't there a 5 year holding period before she can touch her contributions(without the 10% penalty)?(I know she can't touch the interest/capital gains portion).

Anything else I need to inform her on? Thanks for your time. I try to visit this site frequently and find this forum to be exceptional in respect to helping folks like myself.

Once you convert from Traditional to Roth, you have to pay tax on the funds. There is no tax advantage to open a Traditional IRA, get the tax deduction, convert to Roth, then pay tax on the entire amount converted. It becomes a wash, and is not worth the administrative steps. Just start with the Roth.

Contributions (not earnings) to a Roth can be withdrawn at any time and for any reason.

The $4,000 also becomes taxable when it is converted into a Roth.

I would suggest a Roth IRA rather than the regular IRA. Yes, you give up the deduction.... but 4 decades of compounding and then tax free is awfully enticing.

And... don't forget that 401k may be a very compelling deal is there is a match. One year from now, reassess the priorities. You daughter can do both.


Dad - you job is to "suggest", ultimately your daughter needs to take charge of her own money. You can be a huge help by giving her a subscription to "Kiplinger Financial" magazine which covers investing, careers, credit, home buying and general consumer issues. If she spends a few hours each month reading, she will be way ahead of her contemporaries.

Definitely get her to start with a Roth. My local bank has helped me figure out a CD where i could start with $250 and add to it whenever I wanted (but additions had to be over $50, no big deal!) and it has 3.2% interest. I like it a lot, until I get more money and can switch it to a more powerful CD that gets me 5.25% a year. There are also funds online that let an investor to contribute $50 a month toward their Roth IRA, but I haven't look that into it, I've just heard they exist.

I hope your daughter makes the right choice! I started mine in June and am so glad that I did!

To college girl: Congratulations on getting started. You have many years of compound growth ahead, which rewards those that start early.

BUT..... that 3.2% interest rate is terrible. Your money is barely keeping up with inflation. Continue what you are doing for now, then when your Roth assets grow to $2000 you need to look into transferring the account to a mutual fund. Search on "mutual fund" and you will find lots of discussion about how to choose a NO Load fund.

Here is why 3.2% should only be a short term approach: funds invested in a diversified stock portfolio on average double in about 7 years. Funds earning 5% in a CD double in size in about 14 years. Lets use 2000 and assume you are 22 years old and retire at 66. At 5%, you will get approximately 3 "doubles", so your $2000 will grow to $16,000. But if your mutual fund averaged 10%, your 2k would grow to $128,000 over 44 years because you assets double in size 6 times!

(To find how fast a fixed amount will double, divide 72 by the annual percent earnings to get a "rule of thumb" estimate of the number of years to double. This is called "The Rule of 72". Example: at 5% you have 72/5 or about 14 years. At 10%, 72/10 is just over seven years.)