AA in Roth account

[mistymoney]

So I have typically used my roth account for the higest risk/reward bucket, but I am planning to retire next year and I heard somewhere someone kept some cash in their roth for quick access to tax free money in a pinch. May have been here or elsewhere? Idk.

I will be well into the 22% tax bracket for all of my retirement, and the unexpected or bumpy expenses could push me into 24% - or 32% if it was something 'big'.

Would it make sense to leave about 25-50k in quick access cash-like investments?

Or should I just leave it for growth and bite any unexpected tax bullets with 401k/Ira withdrawals during retirement?

[secondcor521]

(The following assumes you have assets in your traditional IRA and Roth IRA that are greater than your perceived ready cash needs.)

It is probably not necessary to leave money in cash for quick access.

If you need quick access to cash, you can always sell your Roth investments and distribute the cash to yourself in a matter of a few days.

If the idea of doing that brings up the concern in your mind that you might have to "sell low" if the market is poor when you're in that pinch, then maybe you do want to have some cash.  I don't think it's the best strategy, but if it helps you sleep at night then it's probably worth it for that reason.

A slightly more complicated middle ground is to keep your "in a pinch" cash in your traditional IRA.  Then if you need cash quickly, sell from the Roth and distribute cash to yourself while simultaneously replacing the investments by buying in your traditional IRA with some of your "in a pinch" cash.  Zero taxes this way, you maintain your AA, you have cash on hand, but the cash, while you wait, is in your traditional rather than your Roth.

...

Personally, I have decided to have very minimal cash on hand, believing that the loss of investment return on the cash by keeping it uninvested during the majority of the time that I do not have a cash emergency outweighs the tax benefit of having ready cash in the few cases when I might need it.  I've followed this policy for nine years now and have had zero big cash needs while remaining invested at 95%+ US equities, which have approximately doubled over that time frame.

Being partially pushed into the 24% bracket wouldn't really be that bad in my opinion.  Because of RMDs and SS later and the associated higher brackets then, you might want to be voluntarily putting yourself in the 24% bracket now anyway (that is a larger discussion on Roth conversions).

Being pushed into the 32% bracket might be sort of bad, but I looked at the brackets just now and anything costing me that much is probably a bigger deal than the tax implications of it.

But my approach works for me because of my investing personality and my general lack of emergencies.  If you're different in either of those respects, then my approach could easily be unappealing.

[ATtiny85]

I assume you have cash/fixed income in your tax deferred account(s)? If so, what's the problem? Keep all equities in Roth. If you need money, sell some of those equities. If they are down or the amount throws off your AA, swap some of that cash/fixed income in tax deferred to equities.

[mistymoney]

(The following assumes you have assets in your traditional IRA and Roth IRA that are greater than your perceived ready cash needs.)

It is probably not necessary to leave money in cash for quick access.

If you need quick access to cash, you can always sell your Roth investments and distribute the cash to yourself in a matter of a few days.

If the idea of doing that brings up the concern in your mind that you might have to "sell low" if the market is poor when you're in that pinch, then maybe you do want to have some cash.  I don't think it's the best strategy, but if it helps you sleep at night then it's probably worth it for that reason.

A slightly more complicated middle ground is to keep your "in a pinch" cash in your traditional IRA.  Then if you need cash quickly, sell from the Roth and distribute cash to yourself while simultaneously replacing the investments by buying in your traditional IRA with some of your "in a pinch" cash.  Zero taxes this way, you maintain your AA, you have cash on hand, but the cash, while you wait, is in your traditional rather than your Roth.

...

Personally, I have decided to have very minimal cash on hand, believing that the loss of investment return on the cash by keeping it uninvested during the majority of the time that I do not have a cash emergency outweighs the tax benefit of having ready cash in the few cases when I might need it.  I've followed this policy for nine years now and have had zero big cash needs while remaining invested at 95%+ US equities, which have approximately doubled over that time frame.

Being partially pushed into the 24% bracket wouldn't really be that bad in my opinion.  Because of RMDs and SS later and the associated higher brackets then, you might want to be voluntarily putting yourself in the 24% bracket now anyway (that is a larger discussion on Roth conversions).

Being pushed into the 32% bracket might be sort of bad, but I looked at the brackets just now and anything costing me that much is probably a bigger deal than the tax implications of it.

But my approach works for me because of my investing personality and my general lack of emergencies.  If you're different in either of those respects, then my approach could easily be unappealing.

good thoughts!

Yes - I think I will leave the cash cache in the regular so Roth can continue higher growth, and then do the accounting as you suggest if need be.

I have thought about doing 25% taxes to do more roth conversions early on. I'll see what the landscape is at the time. Tax rates and brackets, market, mmy expenses, etc. and hopefully can move a bit over.

Depending on the market in the next decade or so, yeah - could be in 32% with RMDs and I need to cash out more each year with my fatty soc sec check. I'd cry, but it would be tears of joy! Still - can see about converting to roth as I go along.

Thanks!

[mistymoney]

I assume you have cash/fixed income in your tax deferred account(s)? If so, what's the problem? Keep all equities in Roth. If you need money, sell some of those equities. If they are down or the amount throws off your AA, swap some of that cash/fixed income in tax deferred to equities.

OK!

[MustacheAndaHalf]

So I have typically used my roth account for the higest risk/reward bucket, but I am planning to retire next year and I heard somewhere someone kept some cash in their roth for quick access to tax free money in a pinch.

Cash from selling an ETF is available the next day (T+1 settlement).

If you really hate receiving interest in a taxable account, you can buy a state-specific mutual fund that is exempt from state and federal taxes.  But in the 22% tax bracket, you will get more money in your pocket from a regular bond or money market fund.

[mistymoney]

So I have typically used my roth account for the higest risk/reward bucket, but I am planning to retire next year and I heard somewhere someone kept some cash in their roth for quick access to tax free money in a pinch.

Cash from selling an ETF is available the next day (T+1 settlement).

If you really hate receiving interest in a taxable account, you can buy a state-specific mutual fund that is exempt from state and federal taxes.  But in the 22% tax bracket, you will get more money in your pocket from a regular bond or money market fund.

thanks - was mainly worried about selling roth assets in a very down market, which I figure is round about the time you might need extra money, lol!

I guess I will keep the roth high on risk/reward, and then determine at the time, if ever, if the downturn or the taxes is the worst bite.

[Telecaster]

thanks - was mainly worried about selling roth assets in a very down market, which I figure is round about the time you might need extra money, lol!

I guess I will keep the roth high on risk/reward, and then determine at the time, if ever, if the downturn or the taxes is the worst bite.

A lot of people have that worry, but IMO that's not the right worry to have.  True emergencies are rare, and if they do happen the best way to deal with them is by having a large net worth.  Holding lots of cash really drags down your portfolio performance.  This can be one of those cases where trying to avoid a loss costs you more than the loss itself.  So hold what you need to sleep comfortably at night, and that's enough.  My own emergency fund is 100% stocks.   The way I look at it is that I need $X amount for an emergency, so if I have $X + 30% in stocks that will do. 

So what to do if you have an emergency and the market is down?  If you have a typical 80/20 balanced portfolio and the market drops, rebalancing rules says you should be selling bonds anyway.