The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: engineerjourney on January 24, 2020, 08:20:47 AM
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So usually we have enough cash flow to fully fund 2 401Ks, a family HSA, and 2 Roth IRAs every year. We are expecting our third kid later this year which means unpaid maternity leave (yay USA). So I would like to have higher than usual cash reserves on hand just in case in. I usually fund both the ROTH IRAs in January or as soon as taxes are filed each year. I was contemplating waiting until closer to the baby's arrival or after just in case. Then I thought of my taxable account. We invested $10K years ago in a taxable brokerage because there was no where else to put it besides a savings account. Its been invested in international index so its only $10.7K now (while also throwing off decent dividends that weren't re-invested). I am thinking of selling those stocks to then fund the Roth IRAs.. It pretty much would offset the unpaid portion of my leave while only being taxed on the profit so it seems like a good time to move the money into a tax advantaged account! We are now qualified for mega backdoor roths at our workplace so any extra funds we have going forward will go to that instead of a taxable account. Does this make sense to do? Am I missing any potential downfalls? I see it as a way to fund the IRAs sooner in the year while still being comfortable with cash reserves with a baby arrival. Thanks!
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This is likely a good idea. My only reservation would be that you might have to pay tax on the $700 gain (although it might be less if some of that is from dividends, which you've already paid tax on), and you might might not have to pay tax on the gains if you sell in retirement. Are you currently above the 0% long term capital gains tax bracket? Will you be below it in retirement.
It sounds like you have enough cash to make the contribution, but want to keep it in cash for the moment due to new baby? You might consider https://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund. If you contribute to Roth, but keep the contribution in a money market fund you can either withdraw from the Roth (contributions can be withdrawn tax and penalty free) or decide to sell from taxable if/when you have the emergency. Chances are you won't have an emergency and you'll end up with money in Roth you can invest and won't have had to sell taxable.
Last question: is this your 2019 contribution or your 2020 contribution you're considering? If it's the 2020 contribution, then you have until April 15, 2021, so there isn't any hurry and you might just consider holding off and not worrying about it right now. Maybe not totally optimal, but not a big deal.
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This is likely a good idea. My only reservation would be that you might have to pay tax on the $700 gain (although it might be less if some of that is from dividends, which you've already paid tax on), and you might might not have to pay tax on the gains if you sell in retirement. Are you currently above the 0% long term capital gains tax bracket? Will you be below it in retirement.
It sounds like you have enough cash to make the contribution, but want to keep it in cash for the moment due to new baby? You might consider https://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund. If you contribute to Roth, but keep the contribution in a money market fund you can either withdraw from the Roth (contributions can be withdrawn tax and penalty free) or decide to sell from taxable if/when you have the emergency. Chances are you won't have an emergency and you'll end up with money in Roth you can invest and won't have had to sell taxable.
Last question: is this your 2019 contribution or your 2020 contribution you're considering? If it's the 2020 contribution, then you have until April 15, 2021, so there isn't any hurry and you might just consider holding off and not worrying about it right now. Maybe not totally optimal, but not a big deal.
Thanks Terran, its the 2020 contribution so I do have a lot of time to decide and maybe am just overthinking things. I would rather have all my money into Roth or Trad accounts so I was just thinking this was an opportunity to move the money from taxable to advantaged on a year we will make a little less than usual due to the unpaid time. I would have to pay tax on the $700. It would be a long term capital gains so it would be 15% tax. I am not sure if our retirement income will be into the 0% cap gains threshold (I hope so) but it will largely depend on mortgage free or not.