Author Topic: Roth IRA vs. non-retirement investing - FIRE  (Read 2968 times)

boyerbt

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Roth IRA vs. non-retirement investing - FIRE
« on: March 11, 2017, 08:12:06 AM »
I did some quick searching online and wasn't able to find solid information so I turned to the MMM team. I am looking to find out if my thinking is correct for investing additional funds into a non-retirement Vanguard account over a Roth-IRA. My reasoning for this is that I plan to FIRE at 55 and I am currently 29 and do not want to be concerned with age and investment restrictions tied to IRAs.

Is this correct? I currently contribute to my company's roth 401k plan and have additional funds now that my debts are all paid to begin concentrating on savings and investments.

MDM

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Re: Roth IRA vs. non-retirement investing - FIRE
« Reply #1 on: March 11, 2017, 01:11:40 PM »
I did some quick searching online and wasn't able to find solid information so I turned to the MMM team. I am looking to find out if my thinking is correct for investing additional funds into a non-retirement Vanguard account over a Roth-IRA. My reasoning for this is that I plan to FIRE at 55 and I am currently 29 and do not want to be concerned with age and investment restrictions tied to IRAs.

Is this correct? I currently contribute to my company's roth 401k plan and have additional funds now that my debts are all paid to begin concentrating on savings and investments.
Removing Roth contributions can be done at any age without fee, penalty, or restriction of any kind.

Unless you already have a guaranteed pension or other guaranteed income that will match your current earnings after you retire, you should probably be using traditional retirement accounts, not Roth (and not taxable) as a first preference.

See Investment Order for more.

Guide2003

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Re: Roth IRA vs. non-retirement investing - FIRE
« Reply #2 on: March 12, 2017, 06:32:55 PM »
Unless you already have a guaranteed pension or other guaranteed income that will match your current earnings after you retire, you should probably be using traditional retirement accounts, not Roth (and not taxable) as a first preference.
Is this really the only parameter to worry about with the TRAD/ROTH choice? Due to the nature of my compensation, my effective tax rate is between 2-3% and its hard not to justify just paying the taxes on that money now, especially with the flexibility of withdrawing the contributions at any time for any reason.

MustacheAndaHalf

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Re: Roth IRA vs. non-retirement investing - FIRE
« Reply #3 on: March 12, 2017, 07:06:09 PM »
boyerbt (original poster) - Roth IRA has a contribution and growth part.  Whatever your originally put in is the amount you can take out at any time with no taxes.  When you put $5,500 in you can take that out at any time.  If that $5,500 Roth grows to $7,500 then you have $2,000 of growth.  The growth has to remain in the account until you satisfy IRS rules like age 59.5.

As to taxable investing, you want to minimize tax.  Bonds throw off ordinary income, so that's the worst thing to have in taxable... but tax-exempt bonds can solve that problem.  I prefer to minimize taxable yield, which means picking US stock funds over international stock funds.  Take your qualified dividends tax rate (probably 15%) and multiply it by the US (~2%) and international (~3%) yields to see how much tax you'd pay.  The foreign tax credit is a bit tricky to calculate, but I believe it doesn't completely offset the higher tax that comes from a higher yield.  In any event it's a small difference, so consider mixing international and US in taxable for rebalance purposes.

Note if retiring at roughly age ~55, you only need ~5 years of expenses before you access everything with a 59.5 age restriction.  You might only need a fraction of your assets in taxable to make this work.  You can also use a Roth conversion ladder to make more assets available before 59.5.


Guide2003 - That's unusual.  Tax rates below 10% favor using a Roth IRA.

MDM

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Re: Roth IRA vs. non-retirement investing - FIRE
« Reply #4 on: March 12, 2017, 07:07:39 PM »
Unless you already have a guaranteed pension or other guaranteed income that will match your current earnings after you retire, you should probably be using traditional retirement accounts, not Roth (and not taxable) as a first preference.
Is this really the only parameter to worry about with the TRAD/ROTH choice? Due to the nature of my compensation, my effective tax rate is between 2-3% and its hard not to justify just paying the taxes on that money now, especially with the flexibility of withdrawing the contributions at any time for any reason.
There can be exceptions, which explains the use of the word "probably".  If your compensation is unusual, then your best course of action may also be unusual.

First, "effective" tax rate is useless for a traditional vs. Roth analysis.  What matters is marginal saving rate now vs. marginal tax rate when withdrawn.

See Traditional versus Roth - Bogleheads for more details.

boyerbt

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Re: Roth IRA vs. non-retirement investing - FIRE
« Reply #5 on: March 13, 2017, 07:02:01 AM »
boyerbt (original poster) - Roth IRA has a contribution and growth part.  Whatever your originally put in is the amount you can take out at any time with no taxes.  When you put $5,500 in you can take that out at any time.  If that $5,500 Roth grows to $7,500 then you have $2,000 of growth.  The growth has to remain in the account until you satisfy IRS rules like age 59.5.

As to taxable investing, you want to minimize tax.  Bonds throw off ordinary income, so that's the worst thing to have in taxable... but tax-exempt bonds can solve that problem.  I prefer to minimize taxable yield, which means picking US stock funds over international stock funds.  Take your qualified dividends tax rate (probably 15%) and multiply it by the US (~2%) and international (~3%) yields to see how much tax you'd pay.  The foreign tax credit is a bit tricky to calculate, but I believe it doesn't completely offset the higher tax that comes from a higher yield.  In any event it's a small difference, so consider mixing international and US in taxable for rebalance purposes.

Note if retiring at roughly age ~55, you only need ~5 years of expenses before you access everything with a 59.5 age restriction.  You might only need a fraction of your assets in taxable to make this work.  You can also use a Roth conversion ladder to make more assets available before 59.5.


Guide2003 - That's unusual.  Tax rates below 10% favor using a Roth IRA.

Thank you for the information.

boyerbt

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Re: Roth IRA vs. non-retirement investing - FIRE
« Reply #6 on: March 13, 2017, 07:04:01 AM »
Unless you already have a guaranteed pension or other guaranteed income that will match your current earnings after you retire, you should probably be using traditional retirement accounts, not Roth (and not taxable) as a first preference.
Is this really the only parameter to worry about with the TRAD/ROTH choice? Due to the nature of my compensation, my effective tax rate is between 2-3% and its hard not to justify just paying the taxes on that money now, especially with the flexibility of withdrawing the contributions at any time for any reason.


I don't see the argument for a traditional account versus a ROTH. Why pay on the growth that comes from the ROTH?

MDM

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Re: Roth IRA vs. non-retirement investing - FIRE
« Reply #7 on: March 13, 2017, 01:02:42 PM »
Unless you already have a guaranteed pension or other guaranteed income that will match your current earnings after you retire, you should probably be using traditional retirement accounts, not Roth (and not taxable) as a first preference.
Is this really the only parameter to worry about with the TRAD/ROTH choice? Due to the nature of my compensation, my effective tax rate is between 2-3% and its hard not to justify just paying the taxes on that money now, especially with the flexibility of withdrawing the contributions at any time for any reason.
I don't see the argument for a traditional account versus a ROTH. Why pay on the growth that comes from the ROTH?
Because of the commutative property of multiplication (as applied to traditional vs. Roth).  See link for more details.