Our current financial/investment situation is listed below. We're not exactly sure what the benefits are to contributing to a Roth IRA over a taxable account when we'll definitely want access to the money prior to age 59 1/2.we currently have both type of accounts open already but want to be sure we're maximizing our little green army. We are turning 26 and 25 early next year, married filing jointly.
*I'm military so BAH and BAS aren't taxable income
Total gross household income: $112k
Gross after traditional TSP/401k contributions: $74k
Taxable gross income: $45k
We also have $7800/yr from a rental but that still keeps us in the 12% tax bracket.
Our guess is that the gains from contributing to a single taxable account will be better than splitting them into our separate Roth's. Plus the flexibility to withdraw at any time. Any advice is appreciated!
Our guess is that the gains from contributing to a single taxable account will be better than splitting them into our separate Roth's.
Our current financial/investment situation is listed below. We're not exactly sure what the benefits are to contributing to a Roth IRA over a taxable account when we'll definitely want access to the money prior to age 59 1/2.we currently have both type of accounts open already but want to be sure we're maximizing our little green army. We are turning 26 and 25 early next year, married filing jointly.
*I'm military so BAH and BAS aren't taxable income
Total gross household income: $112k
Gross after traditional TSP/401k contributions: $74k
Taxable gross income: $45k
We also have $7800/yr from a rental but that still keeps us in the 12% tax bracket.
Our guess is that the gains from contributing to a single taxable account will be better than splitting them into our separate Roth's. Plus the flexibility to withdraw at any time. Any advice is appreciated!
Roth allows withdrawal of the contributions at any time with no penalty. Plus, the growth is 100% tax free.
Our current financial/investment situation is listed below. We're not exactly sure what the benefits are to contributing to a Roth IRA over a taxable account when we'll definitely want access to the money prior to age 59 1/2.we currently have both type of accounts open already but want to be sure we're maximizing our little green army. We are turning 26 and 25 early next year, married filing jointly.
*I'm military so BAH and BAS aren't taxable income
Total gross household income: $112k
Gross after traditional TSP/401k contributions: $74k
Taxable gross income: $45k
We also have $7800/yr from a rental but that still keeps us in the 12% tax bracket.
Our guess is that the gains from contributing to a single taxable account will be better than splitting them into our separate Roth's. Plus the flexibility to withdraw at any time. Any advice is appreciated!
Roth allows withdrawal of the contributions at any time with no penalty. Plus, the growth is 100% tax free.
True. Our plan would be to withdraw enough around age 45 (our target RE date) to either build or payoff our dream home. This would most likely exceed our $228k of estimated contributions by that point. Some quick math seems to support that even taking the 10% penalty on the gains outweighs paying taxes on dividends from a taxable account between now and then. Is this correct?
Our current financial/investment situation is listed below. We're not exactly sure what the benefits are to contributing to a Roth IRA over a taxable account when we'll definitely want access to the money prior to age 59 1/2.we currently have both type of accounts open already but want to be sure we're maximizing our little green army. We are turning 26 and 25 early next year, married filing jointly.
*I'm military so BAH and BAS aren't taxable income
Total gross household income: $112k
Gross after traditional TSP/401k contributions: $74k
Taxable gross income: $45k
We also have $7800/yr from a rental but that still keeps us in the 12% tax bracket.
Our guess is that the gains from contributing to a single taxable account will be better than splitting them into our separate Roth's. Plus the flexibility to withdraw at any time. Any advice is appreciated!
Roth allows withdrawal of the contributions at any time with no penalty. Plus, the growth is 100% tax free.
True. Our plan would be to withdraw enough around age 45 (our target RE date) to either build or payoff our dream home. This would most likely exceed our $228k of estimated contributions by that point. Some quick math seems to support that even taking the 10% penalty on the gains outweighs paying taxes on dividends from a taxable account between now and then. Is this correct?
Our current financial/investment situation is listed below. We're not exactly sure what the benefits are to contributing to a Roth IRA over a taxable account when we'll definitely want access to the money prior to age 59 1/2.we currently have both type of accounts open already but want to be sure we're maximizing our little green army. We are turning 26 and 25 early next year, married filing jointly.
*I'm military so BAH and BAS aren't taxable income
Total gross household income: $112k
Gross after traditional TSP/401k contributions: $74k
Taxable gross income: $45k
We also have $7800/yr from a rental but that still keeps us in the 12% tax bracket.
Our guess is that the gains from contributing to a single taxable account will be better than splitting them into our separate Roth's. Plus the flexibility to withdraw at any time. Any advice is appreciated!
Roth allows withdrawal of the contributions at any time with no penalty. Plus, the growth is 100% tax free.
True. Our plan would be to withdraw enough around age 45 (our target RE date) to either build or payoff our dream home. This would most likely exceed our $228k of estimated contributions by that point. Some quick math seems to support that even taking the 10% penalty on the gains outweighs paying taxes on dividends from a taxable account between now and then. Is this correct?
I don't think your math is correct. My understanding of roth-IRAs is that if you take a non-qualified distribution, you owe the 10% penalty PLUS you owe taxes on the gains at your marginal tax rate. You could do a "substantially equal periodic payments" and avoid the tax, but then you couldn't withdrawal all the money at one time.
Attached is a file I put together with the numbers I came up with - it assumes the 12% tax bracket throughout. Numbers end up being about the same.
Thanks for putting the spreadsheet together! I had been too lazy today to get that far. Seems like it's more personal preference at this point, with maybe a slight edge to taxable.
Have you considered the backdoor Roth IRA conversion strategy? Lots of people here employ this strategy; I'm planning to do the same in 2030.
You can convert TSP or 401k funds to a Roth IRA, and pay the appropriate income tax based on your bracket. There are laddering strategies to lessen the impact (i.e., do it little by little over several years instead of lump sum). The upside is that you end up with much more 'contributions' to your Roth IRA than the limit of $5,500 per year. Then you can access those contributions penalty free before 59.5, if needed.
No, he had it right, its a roth conversion. Mega backdoor roth is when 401k has after-tax contributions and then you roll them over to roth, paying tax on the earnings.Have you considered the backdoor Roth IRA conversion strategy? Lots of people here employ this strategy; I'm planning to do the same in 2030.
You can convert TSP or 401k funds to a Roth IRA, and pay the appropriate income tax based on your bracket. There are laddering strategies to lessen the impact (i.e., do it little by little over several years instead of lump sum). The upside is that you end up with much more 'contributions' to your Roth IRA than the limit of $5,500 per year. Then you can access those contributions penalty free before 59.5, if needed.
Just to be clear, what you are describing here is the Mega Backdoor Roth. The Backdoor Roth is when someone who makes too much money to contribute directly to a Roth IRA contributes to a traditional IRA then rolls those funds into a Roth IRA.
The Mega Backdoor Roth is not something worth considering until other avenues (such as 401k,HSA,IRA) are maxed.
See here for investment order: https://forum.mrmoneymustache.com/investor-alley/investment-order/
No, he had it right, its a roth conversion. Mega backdoor roth is when 401k has after-tax contributions and then you roll them over to roth, paying tax on the earnings.
Right, I thought that's what was meant by "401k funds". If not then I stand corrected.
But that leads to the question of "why bother" unless the O.P. wanted to contribute more than the max IRA limits.
We can assume that their income is low enough to contribute directly to a Roth IRA since they are asking if they should.
Even a Roth 401k doesn't allow you to access contributions early, right?Wrong (I think*).
Yep, I meant 401k contributions. Sorry for the sloppy terminology.
As for 'why bother' -- the OP mentioned wanting to pay for a dream home after FIRE at age 45. A Roth IRA conversion makes sense here, since he/she seems to be maxing out pre-tax 401k contributions and will have a substantial nest egg by then. Even a Roth 401k doesn't allow you to access contributions early, right?
Wrong (I think*).
Roth IRA Withdrawal Rules
https://www.rothira.com/roth-ira-withdrawal-rules
"If you are under 59½, you may withdraw the exact amount of your Roth IRA contributions with no penalties."
* I'm assuming a Roth 401K vs a Roth IRA are substantially the same except for higher contribution limits for the Roth 401K, but I haven't researched the specific question w.r.t. a Roth 401K in any depth because the OP referred to Roth IRA accounts.
Our understanding (wife is also an accountant) is that the only difference in the Roth IRA vs taxable is the taxable funds are taxed on short term gains each year instead of only being taxed on the gains from a Roth IRA when you withdraw them. If this is indeed true, the difference with the early withdrawal penalty factored in should be negligible.
Am I off base with this?
QuoteOur understanding (wife is also an accountant) is that the only difference in the Roth IRA vs taxable is the taxable funds are taxed on short term gains each year instead of only being taxed on the gains from a Roth IRA when you withdraw them. If this is indeed true, the difference with the early withdrawal penalty factored in should be negligible.
Am I off base with this?
This is off base.
Each year a fund in a regular taxable account is taxed on dividends, short term capital gains distributed by the fund, and long term capital gains distributed by the fund. When you sell shares of the fund, you are then taxed on the capital gains (which may be taxed at 0% depending on your tax bracket).
In a Roth IRA, you don't pay any of those taxes, ever.
Ah, I had the feeling I was missing something but the info on the internet is incredibly difficult to decipher on this subject. Any advice on how to incorporate that into spreadsheet calculations to do a factual comparison between the two for VTSAX?Table below is from the 'Misc. calcs' tab of the case study spreadsheet (http://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/).
Growth in a taxable account | |||
cgt = capital gain tax rate, % | 15.0% | ||
d = annual dividend rate, % | 2.0% | ||
g = annual growth excluding dividends, % | 6.0% | ||
n = years invested, yr | 20 | ||
Compounding periods/yr | 1 | ||
P = principal invested at start, $ | $10,000 | ||
Pmt = Recurring deposits, $ | $ | ||
1 = pmt at start, 0 = at end | 0 | ||
t = tax rate on dividends, % | 15.0% | ||
nc = Number of compounding periods | 20 | ||
dc = compounding dividend rate, % | 2.0% | ||
gc = compounding growth excl. div., % | 6.0% | ||
e = tax-adjusted growth, % | 7.70% | ||
ecgt = tax-adjusted cap. gain tax rate, % | 11.688% | ||
Basis | $17,526 | ||
FBT = Future, before tax, value | $44,087 | ||
FAT = Future, after tax, value | $40,103 |
Ah, I had the feeling I was missing something but the info on the internet is incredibly difficult to decipher on this subject. Any advice on how to incorporate that into spreadsheet calculations to do a factual comparison between the two for VTSAX?Table below is from the 'Misc. calcs' tab of the case study spreadsheet (http://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/).
With no taxes (i.e., how a Roth works), the result would be $46,610 instead of $40,103.
Growth in a taxable accountcgt = capital gain tax rate, % 15.0% d = annual dividend rate, % 2.0% g = annual growth excluding dividends, % 6.0% n = years invested, yr 20 Compounding periods/yr 1 P = principal invested at start, $ $10,000 Pmt = Recurring deposits, $ $ 1 = pmt at start, 0 = at end 0 t = tax rate on dividends, % 15.0% nc = Number of compounding periods 20 dc = compounding dividend rate, % 2.0% gc = compounding growth excl. div., % 6.0% e = tax-adjusted growth, % 7.70% ecgt = tax-adjusted cap. gain tax rate, % 11.688% Basis $17,526 FBT = Future, before tax, value $44,087 FAT = Future, after tax, value $40,103
So what is the final value of the Roth after taxes on gains and early withdrawal penalty?What are you assuming for the amount of gains and your marginal tax rate?
True. Our plan would be to withdraw enough around age 45 (our target RE date) to either build or payoff our dream home. This would most likely exceed our $228k of estimated contributions by that point. Some quick math seems to support that even taking the 10% penalty on the gains outweighs paying taxes on dividends from a taxable account between now and then. Is this correct?Use Roth contributions for the down payment, then rollover sufficient funds from taxable retirement account(s) into a traditional IRA to set up SEPP withdraws from that account to make the mortgage payments. Don't be so emotionally tied to being mortgage free that you take a sub-optimal route to FIRE.
So what is the final value of the Roth after taxes on gains and early withdrawal penalty?What are you assuming for the amount of gains and your marginal tax rate?
True. Our plan would be to withdraw enough around age 45 (our target RE date) to either build or payoff our dream home. This would most likely exceed our $228k of estimated contributions by that point. Some quick math seems to support that even taking the 10% penalty on the gains outweighs paying taxes on dividends from a taxable account between now and then. Is this correct?Use Roth contributions for the down payment, then rollover sufficient funds from taxable retirement account(s) into a traditional IRA to set up SEPP withdraws from that account to make the mortgage payments. Don't be so emotionally tied to being mortgage free that you take a sub-optimal route to FIRE.
Tax = ($46,610 - $10000) * (12% + 10%) = $8,054.So what is the final value of the Roth after taxes on gains and early withdrawal penalty?What are you assuming for the amount of gains and your marginal tax rate?
Using the gains of one 10k contribution like you did for the above taxable calculation. marginal tax rate would be 12%