Author Topic: Should I use taxable funds to max Roth IRA?  (Read 2328 times)

lcerrito

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Should I use taxable funds to max Roth IRA?
« on: February 20, 2018, 10:53:58 AM »
We've encountered a barrage of medical bills this year, and therefore we will only be able to max out our 401K's and HSA's this year. I hate to miss out on a year's contribution to my Roth IRA, which I've previously been able to max out.

Would it make sense to sell $5500 of my Vanguard taxable funds (VFIAX) and then buy into my Roth IRA (VTSAX) for 2018? We were in the 25% tax bracket for 2017, so we will pay tax on any long term capital gains from the taxable account.

My taxable funds are meant to be long term for FIRE, so no worries about depleting any emergency funds by doing this. I'm just trying to make sure I'm the most tax advantaged I can be.

ETA: My husband and I are 28 if that matters.
« Last Edit: February 20, 2018, 10:55:30 AM by lcerrito »

sherr

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Re: Should I use taxable funds to max Roth IRA?
« Reply #1 on: February 20, 2018, 11:27:17 AM »
I'm gonna say probably not.

The trade-off you would be making by doing that would be choosing to pay your 15% long-term capital gains now and paying nothing later, vs paying nothing now and paying 15% long-term capital gains later on larger gains. BUT not all things are equal, because if you sell the stocks after you are FIREd and are not in the 25% tax bracket then the long-term capital gains rate will be 0% (assuming nothing changes).

So likely what you'd be doing is choosing to pay taxes now and nothing later, vs nothing now and nothing later. If you have reason to believe something in there is not true (maybe you'll be in the 25% bracket in retirement, or maybe they'll change the tax law so that capital gains are always taxed or something) then you can make your own decisions, but I wouldn't touch it.

sherr

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Re: Should I use taxable funds to max Roth IRA?
« Reply #2 on: February 20, 2018, 11:37:35 AM »
If on the other hand you were talking about selling taxable stocks to fund a Traditional IRA - and your income is low enough that it's deductible - I'd say yes.

https://www.irs.gov/retirement-plans/ira-deduction-limits

In that case what you'd be doing is paying the 15% long-term capital gains in order to deduct the amount from your taxes and save you an immediate 25%, which seems like a no-brainer (and no future fortune telling required). I mean it only would be an extra $550 in your tax rebate, but hey, $500 is $500.

For what it's worth I think that if you're both in the 25% bracket (or higher) but can still deduct Traditional IRA contributions, then Traditional over Roth is almost always the correct choice.

Bird In Hand

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Re: Should I use taxable funds to max Roth IRA?
« Reply #3 on: February 20, 2018, 12:02:15 PM »
If on the other hand you were talking about selling taxable stocks to fund a Traditional IRA - and your income is low enough that it's deductible - I'd say yes.

Since the OP and spouse have been maxing 401k accounts, that leads me to believe they are not eligible for deductible IRAs.

I also can't imagine many scenarios where it makes sense to contribute to Roth after a 15% LTCG tax on taxable investments on top of 25% income tax.

sherr

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Re: Should I use taxable funds to max Roth IRA?
« Reply #4 on: February 20, 2018, 12:27:26 PM »
If on the other hand you were talking about selling taxable stocks to fund a Traditional IRA - and your income is low enough that it's deductible - I'd say yes.

Since the OP and spouse have been maxing 401k accounts, that leads me to believe they are not eligible for deductible IRAs.

Well they may not be but that's why I specified the condition in bold and added the link. It's certainly possible. Joint MAGI of $101k + already deducted 2x $18.5k 401k contributions + already deducted $6.9k HSA puts us around $145k.

It's entirely possible to make less than $145k and are still max out two 401ks.

Bird In Hand

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Re: Should I use taxable funds to max Roth IRA?
« Reply #5 on: February 20, 2018, 01:08:43 PM »
If on the other hand you were talking about selling taxable stocks to fund a Traditional IRA - and your income is low enough that it's deductible - I'd say yes.

Since the OP and spouse have been maxing 401k accounts, that leads me to believe they are not eligible for deductible IRAs.

Well they may not be but that's why I specified the condition in bold and added the link. It's certainly possible. Joint MAGI of $101k + already deducted 2x $18.5k 401k contributions + already deducted $6.9k HSA puts us around $145k.

It's entirely possible to make less than $145k and are still max out two 401ks.

You're right -- good point.  I tend to automatically think "dual maxed 401k => ineligible for deductible IRAs", but there is a (narrowish) range of incomes where the deduction is possible.

nereo

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Re: Should I use taxable funds to max Roth IRA?
« Reply #6 on: February 20, 2018, 01:15:41 PM »
Quote
My taxable funds are meant to be long term for FIRE, so no worries about depleting any emergency funds by doing this. I'm just trying to make sure I'm the most tax advantaged I can be.

Based on this statement I would say "yes."

Assuming the OP has sufficient savings to weather other very bad events it makes sense to contribute to a Roth IRA.  If necessary he/she can withdraw contributions at any time without penalty, the money will grow tax-free and gains will be tax-free with normal retirement restrictions.

sherr

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Re: Should I use taxable funds to max Roth IRA?
« Reply #7 on: February 20, 2018, 01:34:33 PM »
Quote
My taxable funds are meant to be long term for FIRE, so no worries about depleting any emergency funds by doing this. I'm just trying to make sure I'm the most tax advantaged I can be.

Based on this statement I would say "yes."

Assuming the OP has sufficient savings to weather other very bad events it makes sense to contribute to a Roth IRA.  If necessary he/she can withdraw contributions at any time without penalty, the money will grow tax-free and gains will be tax-free with normal retirement restrictions.

Did... did you even bother reading any of the other responses?

terran

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Re: Should I use taxable funds to max Roth IRA?
« Reply #8 on: February 20, 2018, 01:47:09 PM »
I probably would, unless you have very low cost basis since, as Sherr points out, you'll have to pay 15% tax on any capital gains which you won't have to do if you have lower income in retirement. Unless you have especially low cost basis, or you're especially near retirement the future tax free growth in the roth is probably better than the loss you'll have by paying a bit of tax on current gains.

You mention specifically selling VFIAX in taxable and buying VTSAX in Roth -- Why not sell VFIAX and buy it back in the Roth? Or are you wanting to rebalance?

nereo

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Re: Should I use taxable funds to max Roth IRA?
« Reply #9 on: February 20, 2018, 01:51:52 PM »
Quote
My taxable funds are meant to be long term for FIRE, so no worries about depleting any emergency funds by doing this. I'm just trying to make sure I'm the most tax advantaged I can be.

Based on this statement I would say "yes."

Assuming the OP has sufficient savings to weather other very bad events it makes sense to contribute to a Roth IRA.  If necessary he/she can withdraw contributions at any time without penalty, the money will grow tax-free and gains will be tax-free with normal retirement restrictions.

Did... did you even bother reading any of the other responses?
yes.
I'm not sure what you are getting at.

dandarc

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Re: Should I use taxable funds to max Roth IRA?
« Reply #10 on: February 20, 2018, 01:54:34 PM »
If you're talking about 2018 contributions, you've got a year and almost 2 months still to make them.  The deadline is the tax-filing deadline.  For 2018 contributions, that is 4/15/2019.  So perhaps the money isn't there this year, but you could fund it in the first couple of months of 2019.

I'd lean towards not incurring the gains if you can avoid it.  Simplest way to do that is to fund it out of income, and maybe you've got a few more months to do that than you thought?

lcerrito

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Re: Should I use taxable funds to max Roth IRA?
« Reply #11 on: February 20, 2018, 03:06:43 PM »
Thank you everyone for your feedback!
We actually are in the sweet spot for married filing jointly to deduct Traditional IRA contributions, so perhaps we'll take a look at that. I already have an IRA with Vanguard from a previous employer's 401k rollover.

To dandarc's point though, we've still got 14 months to make the 2018 Roth IRA contributions. I probably shouldn't jump the gun in case there's a windfall or promotion in our future. Thank you for grounding me. :)

cchrissyy

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Re: Should I use taxable funds to max Roth IRA?
« Reply #12 on: February 20, 2018, 03:36:55 PM »
how much unrealized gains would be in that $5500?
do you have anything you can sell which doesn't have as much gain?

Bird In Hand

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Re: Should I use taxable funds to max Roth IRA?
« Reply #13 on: February 20, 2018, 04:49:31 PM »
Thank you everyone for your feedback!
We actually are in the sweet spot for married filing jointly to deduct Traditional IRA contributions, so perhaps we'll take a look at that. I already have an IRA with Vanguard from a previous employer's 401k rollover.

To dandarc's point though, we've still got 14 months to make the 2018 Roth IRA contributions. I probably shouldn't jump the gun in case there's a windfall or promotion in our future. Thank you for grounding me. :)

Good plan.  Although knowing that you can get a (fully?) deductible traditional IRA, I think you should consider that vs the Roth.  It's hard to turn down that sweet $2,420 tax savings this year!  Especially when you can let it grow in your after-tax accounts, then use it in the future to cover living expenses while you convert your traditional IRAs to Roth in a very low tax bracket.