Author Topic: To ROTH or not to ROTH?  (Read 944 times)

frugalfoothills

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To ROTH or not to ROTH?
« on: November 30, 2018, 01:55:06 PM »
I have about $8K in an emergency fund, all cash, 1% APR. Not ideal.

2018 was a big Get My Shit Together year (paid off debt and saved up an EF) and I'm feeling good about where I'm sitting headed into 2019.

As far as investments go, I only have my 401k (100% index funds) and HSA (also 100% index funds). I'll be increasing 401k contributions when enrollment opens up in January and I'm planning on opening a Traditional IRA for 2019 now that my (non-mortgage) debt is paid off/my cash savings are stable.

Can't help but feel like I should drop $5,500 of this $8K into a ROTH IRA and only hang onto a few thousand bucks in cash for true emergencies. I've got plenty of credit I could use in an emergency while waiting to pull money out of the ROTH if needed. I think I'm feeling emotionally attached to the cash because I feel such peace of mind in my current situation knowing it's right there for me to use at any moment's notice (peace of mind I didn't have for YEARS while I was in debt) and my emotions are getting in the way of logic here.

What say you?

EDIT: Sorry about the duplicate post.
« Last Edit: November 30, 2018, 01:58:55 PM by frugalfoothills »

frugaliknowit

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Re: To ROTH or not to ROTH?
« Reply #1 on: November 30, 2018, 02:12:06 PM »
From the limited information (feel free to provide more, like age, goals, etc.), my $.02:

Reminds me of someone trying to build a house in a rush without a proper foundation...don't let your emotions run you.  Folks without adequate cash normally end up raiding their retirement savings down the road.

frugalfoothills

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Re: To ROTH or not to ROTH?
« Reply #2 on: November 30, 2018, 02:23:46 PM »
Thanks for the feedback, I see what you're saying. I think if having the $8K in cash gives me peace of mind I should probably just hang onto it as-is. I read comments where folks chastise others for keeping cash on hand that could/should be invested and I start to feel like I'm not doing everything right.

Don't let perfect get in the way of good!

Rob_bob

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Re: To ROTH or not to ROTH?
« Reply #3 on: November 30, 2018, 02:53:11 PM »
Put the cash in an Alley 11 month no penalty CD @ 2%

robartsd

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Re: To ROTH or not to ROTH?
« Reply #4 on: November 30, 2018, 03:13:15 PM »
Thanks for the feedback, I see what you're saying. I think if having the $8K in cash gives me peace of mind I should probably just hang onto it as-is. I read comments where folks chastise others for keeping cash on hand that could/should be invested and I start to feel like I'm not doing everything right.

Don't let perfect get in the way of good!
You can open a Roth IRA Savings account (Ally currently offers 2% APY). You protect the money from loss, while claiming your tax advantaged space for 2018. Later if your savings rate means that you max out all your tax advantaged accounts, you can move the Roth IRA Savings to a Roth IRA Mutual fund account while your new taxable savings refills your regular savings account emergency fund.

CalBal

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Re: To ROTH or not to ROTH?
« Reply #5 on: November 30, 2018, 03:59:07 PM »
Capital One 360 Money Market account is now at 2%for deposits $10,000 and over. Pretty instantly available and if the balance drops below 10k it goes to the regular Capital One 360 savings account rate of 0.85%, but only for the time it is below that threshhold. If you think you can get to 10k this is definitely worth it.

I think Ally also has 2% Money Market account, possibly with no lower limit. I have been with Capital One 360 a long time though, so I just stay with them.

You have up until tax day to fund your 2018 IRA, maybe you could continue stashing cash with the goal of funding your IRA, and if you make it to 5500 pull the trigger, and if you don't make it you could decide if what you have saved, plus some money from your EF, is worth it to you. You could also fund less than 5500 at that point too. So! No need to be hasty. :) I think sit with that level of EF for a bit and see how it feels. :)

patchyfacialhair

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Re: To ROTH or not to ROTH?
« Reply #6 on: November 30, 2018, 04:14:48 PM »
Emotional peace is priceless. Keep it in cash for now.

As much as this forum focuses on relentless financial optimization, I find that life is much better when it's balanced with emotional optimization.

Boofinator

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Re: To ROTH or not to ROTH?
« Reply #7 on: November 30, 2018, 04:54:58 PM »
Thanks for the feedback, I see what you're saying. I think if having the $8K in cash gives me peace of mind I should probably just hang onto it as-is. I read comments where folks chastise others for keeping cash on hand that could/should be invested and I start to feel like I'm not doing everything right.

Don't let perfect get in the way of good!
You can open a Roth IRA Savings account (Ally currently offers 2% APY). You protect the money from loss, while claiming your tax advantaged space for 2018. Later if your savings rate means that you max out all your tax advantaged accounts, you can move the Roth IRA Savings to a Roth IRA Mutual fund account while your new taxable savings refills your regular savings account emergency fund.

I agree with robartsd. The beauty of the Roth IRA is you can pull out the principal at any time without tax repercussions. So on the off-chance you have an emergency, your emergency fund is easily available without penalty.

Once you lose tax-advantaged space, you can never reclaim it. And if you are young (as I presume), that tax-free compounding will be worth quite a bit some day.

MDM

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Re: To ROTH or not to ROTH?
« Reply #8 on: November 30, 2018, 06:13:17 PM »
Consider Roth IRA as an emergency fund - Bogleheads.  Seems to fit your situation well.

cl_noll

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Re: To ROTH or not to ROTH?
« Reply #9 on: December 01, 2018, 07:59:05 AM »
From the perspective of someone a little older who kept too much money in cash for too long, I regret not opening a Roth as soon as I started getting serious about saving, and even then I should have opened one sooner. 

Does your job appear fairly secure (no guarantees, of course)? Are you in good health? Do you expect to keep your expenses level and continue at a healthy savings rate?

If so, take a deep breath, open that Vanguard Roth, and tell yourself you'll probably be fine.  It's only $5500/year, and you have until April '19 to max out your 2018 contribution.  Just start dropping 1k or 2k in per month until you max out 2018, then start working on 2019. It'll feel great! You'll probably end up saving more than what you can dump into the Roth, which you can then put into some kind of emergency CD/govt Bond/taxable brokerage account/ high yield internet savings account.

Even with a 1.5%  difference between what you're currently getting and higher yield option, you're paying $120/ year for that "convenience & peace of mind". Over 4 years, that adds up to almost $500!

FatFI2025

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Re: To ROTH or not to ROTH?
« Reply #10 on: December 01, 2018, 08:42:00 AM »
Consider Roth IRA as an emergency fund - Bogleheads.  Seems to fit your situation well.

As someone who had the withdrawal from my Roth IRA EF, I would recommend this appoach as a supplement. So you have 3 months expenses in a taxable account (savings or brokerage) and then at least three months in a Roth IRA in money market or short term bonds. The idea is that in an emergency you would take from the taxable account first to minimize the tax reporting. In my case the IRS came back and charged me a 10% penalty with interest which I then had to fight. That's definitely not worth a tiny bit of tax savings.

Bottom line is that $8k is not a large EF so keep that in a low risk, accessible account before funding the Roth IRA.

robartsd

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Re: To ROTH or not to ROTH?
« Reply #11 on: December 03, 2018, 09:37:57 AM »
Bottom line is that $8k is not a large EF so keep that in a low risk, accessible account before funding the Roth IRA.
My point is that you don't have to choose between Roth IRA and low risk, accessible account - a Roth IRA savings account is both! You have just as much access to the funds as any other savings account if an emergency comes up and there is no tax consequence (other than paperwork) for taking out what you put in (just don't take out any interest earned before reaching 59.5). If you later save more than you can put into tax advantaged accounts you can move the Roth IRA from a savings account to an investment account and use regular savings account for emergency fund.