Author Topic: any reason *not* to contribute to Roth?  (Read 3361 times)

Cressida

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any reason *not* to contribute to Roth?
« on: March 18, 2015, 09:02:29 PM »
DH and I are both maxing out our 401(k) contributions. We make too much for tIRA contributions to be deductible, but not so much that we're disallowed from contributing to a Roth. Can anyone think of a reason why maxing out the Roth contribution is *not* a good idea? I can't think of one, but the tax rules around IRAs are so bleeping complicated that I'm not confident I didn't miss anything.

We have a taxable account too, and contribute to that, but seems to me that we should also establish Roths and put some of those contributions there instead of in the taxable account.

sol

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Re: any reason *not* to contribute to Roth?
« Reply #1 on: March 18, 2015, 09:09:25 PM »
The usual argument against Roths is that the tax deferred growth may not be worth very much for short timelines until an early retirement, and the access rules are somewhat restrictive as compared to just investing in a taxable brokerage account.

In your case it sounds like your income is high enough that you're going get hammered on any after-tax vehicle, including both Roth IRAs and taxable accounts.  So you just need to weigh whether having the earnings on your investment sealed away in a Roth is worth having those earnings grow tax free until retirement age.

Parallel discussion you might find helpful:  http://forum.mrmoneymustache.com/investor-alley/go-curry-cracker-roth-vs-taxable/
« Last Edit: March 18, 2015, 10:10:19 PM by sol »

MDM

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Re: any reason *not* to contribute to Roth?
« Reply #2 on: March 18, 2015, 09:46:25 PM »
We have a taxable account too, and contribute to that, but seems to me that we should also establish Roths and put some of those contributions there instead of in the taxable account.
One can get caught short trying to RE if there is no access to funds, so having sufficient taxable money (or, if available, 457 accounts) is needed.  If you will have enough in taxable/457 to get you through five years of a Roth pipeline, then you might as well take maximum advantage of Roths.

Cressida

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Re: any reason *not* to contribute to Roth?
« Reply #3 on: March 18, 2015, 10:04:14 PM »
Yeah, good points. Unfortunately right now I have almost no idea when I'll need the money because DH hasn't totally bought into MMM. He might decide to cut back his hours in a few years, or he might decide to work full-time for the next 15. If it's the former, then contributing to Roths is probably worse than pointless (although, and I forgot to mention this part, DH actually has a Roth already - not a whole lot, around $30K, and he hasn't contributed to it in years). But if the latter, he'll be a bit past 59.5 when he quits, so a Roth would be a ready source of cash.

I'll keep thinking about it. There are some interesting observations at sol's link about changes to tax law, too.

theoverlook

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Re: any reason *not* to contribute to Roth?
« Reply #4 on: March 19, 2015, 01:26:06 PM »
Remember you can always withdraw your principal (deposits) from the Roth without tax or penalty, it's only withdrawing the returns that spur a penalty.

Cressida

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Re: any reason *not* to contribute to Roth?
« Reply #5 on: March 20, 2015, 06:41:35 PM »
Remember you can always withdraw your principal (deposits) from the Roth without tax or penalty, it's only withdrawing the returns that spur a penalty.

Right - I knew that, but thanks for bringing it up anyway because I think I was unfairly minimizing that as an advantage just because of the contribution limits. So I thought, "oh, $5500/year, we might retire soon, that's not that much." But really, even in the BEST case where we quit in five years, that's still two of us times five years times $5500 = $55K, which is definitely not even close to nothing, and with tax-free withdrawals. You might have convinced me to pull the trigger.

[of course that assumes there isn't a market disaster where the portfolio ends up worth less than the contributions, which can always happen ...]

Doulos

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Re: any reason *not* to contribute to Roth?
« Reply #6 on: March 20, 2015, 07:27:56 PM »
If you are making so much money, such that you are able to fund a 401k, HSA, Roth, and taxable too. 
Then do it!

I would rate it like this; if you are worried about having cash on hand for FIRE.
HSA to match
401k to match
Taxable up to (Expenses - 5.5k or 11k)
Roth max ($11k in your case)
HSA max
401k max
Taxable

Thus if you are looking a lavish $42k lifestyle for the two of you; 5 years from now for 5 years of savings until your ladder is $210k.
Since you have 30k already in Roth.  ? in Taxable investments (assuming zero). 210-30 = 180.  180/5 = 36.
- Taxable = 25k
- Roth = 11k
- These numbers do not assume your money will grow; thus they are safe.

So assuming you make lots of money, from your comments; More than ~$118k taxable (x>160k gross).
- Spending = $42k
- HSA = $6,650
- 401k = 36k (18k limit per person)
- Roth = 11k
- Taxable = $25k + Left overs (probably at least $35k)

Feel free to let me know if I totally missed something there.

Cressida

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Re: any reason *not* to contribute to Roth?
« Reply #7 on: March 21, 2015, 10:41:44 PM »
I don't think you missed anything in a generic scenario, but there are always circumstances. Like, our mortgage is pretty high (our fault), and we happen to have a little extra money this year because DH cashed out a life insurance policy (also not a great investment). It's true I'm hoping we can continue to fund the Roth in future years without similar windfalls, but it would mean we'd have to continue to find expenses to cut. And I do think we can, but, you never know for *sure* when there's someone else in the picture.

I do really appreciate everyone's comments.