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Learning, Sharing, and Teaching => Investor Alley => Topic started by: CEG on July 03, 2018, 09:33:36 PM

Title: Roth IRA vs Plain Index Funds
Post by: CEG on July 03, 2018, 09:33:36 PM
Hello everyone, forgive me if this question has been asked, but I'm new to the forum and also new to investing.

I'd like to invest a small amount of savings and I am unsure whether or not to create a Roth IRA.  About me: I am currently a medical resident making about 25% of the money that I intend to be making in a few years, when I complete my residency.  This would seem to point me toward a Roth Ira, as I will likely be in a higher tax bracket in the future than in the present.

But I also intend to retire early.  Is it possible to live off of the returns from a Roth IRA if one retires much before age 60, or will I be penalized?  Is it more beneficial to just use a regular Vanguard or Betterment account to invest in index funds?  Am I forgetting traditional IRAs?  401Ks?

Thank you for taking the time.
Title: Re: Roth IRA vs Plain Index Funds
Post by: SwitchActiveDWG on July 04, 2018, 05:20:21 AM
Do you have access to a 401k?

Yes it is possible to live off returns from a Roth before 60 but itís not the optimal way. Also a Roth IRA is a tax sheltered account that can be used to invest in Index funds (through Vangiard, Betterment, etc..) so you can invest in index funds with a Vanguard account and have those investments under a Roth.

See this thread:

And this one:
Title: Re: Roth IRA vs Plain Index Funds
Post by: CEG on July 04, 2018, 10:24:17 AM
Thanks for replying.  I don't believe that I have access to a 401k through work, and definitely not one that matches.  So that would make a traditional or Roth IRA the next best option per the Investment Order thread since I already have health insurance.

Seems like a Roth IRA would be better than a traditional IRA for me since my anticipated income is higher than my current income?  And in order to access that without penalty before age 59 1/2, I would just need to leave it there for 5 years?  (I definitely will not be retiring in the next five years)  Or am I missing something?

I just don't want to put my investment money into something that will negative all the gains if I am able to successfully retire in 10 years or so.
Title: Re: Roth IRA vs Plain Index Funds
Post by: terran on July 04, 2018, 10:48:55 AM
You currently work for a hospital? I highly doubt they don't offer a retirement plan. Probably a 403(b), which is basically a 401(k) but for non-profits. There may be restrictions on how long you have to work there before you can contribute. Google "hospital name benefits" and see what you find.

How does your current earnings compare to what you expect to spend in retirement? How do your current state taxes compare to the the state in which you expect to retire? Marginal tax rate now vs marginal tax rate when you withdraw are all the matter in the traditional vs Roth decision. Marginal tax rate in the middle doesn't matter except in as much as you'll need to make the decision again at that point.
Title: Re: Roth IRA vs Plain Index Funds
Post by: MustacheAndaHalf on July 04, 2018, 10:53:07 AM
Roth IRAs have two parts.

When you contribute $5,500 to a Roth IRA, your "contributions" are $5,500.  You can take out that exact amount in the future, with no penalty.  The other part is growth: if that $5,500 grows to $6,000 you have $500 worth of growth.  The growth needs to be left in the Roth IRA until age 59.5, and is penalized if removed early.

At higher incomes, you can't contribute to a Roth IRA.  I'd guess you can only contribute for 1-3 years, and so have $16,500 worth of contributions (max $5,500/year).  Since you aren't retiring on $16,500 I'd take advantage of the tax benefit but otherwise not count on the money in the Roth IRA for retirement.  You will need something that can hold more.

Oh, and you might want to check out "White Coat Investor" - either the book or the website
Title: Re: Roth IRA vs Plain Index Funds
Post by: CEG on July 05, 2018, 06:50:03 PM
Sounds great thank you all for the advice!
Title: Re: Roth IRA vs Plain Index Funds
Post by: bilmar on July 06, 2018, 09:22:21 AM
My 2c....

If you won't have access to private healthcare when you FIRE then an under-appreciated benefit of Roth is how it can  impact your Obamacare rates.

Say you are planning for the typical ( but high in my opinion) $40k per year. Your MAGI after deductions etc will be about $30K.

Using my real world numbers for a 59 yr old in FL:

A silver plan at $30K MAGI costs  $3000 per yr and has a $7K deductible
Same plan at $15K MAGI costs $700 per yr and has  a $0 deductible

How do get from $30K down to $15K? 

Since ROTH distributions don't count, just get about half your income from that Roth IRA you funded before retirement.

I have seen many articles suggesting that Trad vs Roth IRA is a toss up depending on how much you expect to make now vs retirement but Healthcare costs can really make a difference and having the ability to change your 'income' at will may come in handy for other tax reasons in the future.


Title: Re: Roth IRA vs Plain Index Funds
Post by: dollarchaser on July 09, 2018, 10:07:40 AM
Thanks Bill for the real world example of health care expenses related to income. When creating a game plan for FI this will help me a lot .

For the OP I was thinking the Roth money becomes a emergency fund. Obviously it gives more options than just that.