Eating my words

Screen shot 2013-03-19 at Mar 19, 2013, 11.38.37 PM

Remember the controversial post I wrote a month or two ago titled “Screw my Roth IRA” where I blew the whistle on why Roths suck? Many of you wanted to burn me at the stake; accusing me of financial blasphemy. The comments section of that post got a little heated, but with the help of some fellow PDITF readers, my point was actually getting through to those who originally opposed it. I was vindicated. I had written an article that forced people to think about the Roth differently. I concluded that post with the following statement:

I don’t hate my Roth. I’ll continue to let what money is in there grow tax-free, but I’ll probably never contribute to it again.

Now comes the part where I eat my words…

I’m going to contribute to my Roth IRA this year.

I’m horrible I know. I say one thing, but do another. I reek of hypocrisy and Dr. Pepper (side note: I LOVE Dr Pepper).

I use to think the Roth was the sexiest thing ever, but the facts prove that’s simply not true. So what gives? Why am I continuing on with Roth contributions when I think Roths kinda suck?

Check it…

We will soon have more cash than we want/need.

We should hit our $100,000 savings goal in the next few months. That’s where I’m drawing the line. I’m a big believer that there is a such thing as saving too much. Even though 80% of this will probably go towards our down payment, I’ve already told you I don’t really want more than $10,000 in the bank at any given time.

Once we’ve hit our six-figure goal, we will have to be more creative with our discretionary income. This is why we’ll be having our first-ever No Save Month in November. To keep our cash reserves in check, I’ll likely throw another $5,500 in to my Roth, start contributing to my taxable investment account, and if we still have some leftover cash, I’ll try to max out my 401k. Meeting our savings goal affords us the opportunity to maximize our investment potential.

The Roth acts as a secondary emergency fund. 

This is the only significant advantage the Roth has over a traditional 401k, in my opinion. With a Roth, one can withdraw their contributions at any time, for any reason, without having to pay any penalties or taxes on that withdrawal. For example, I have a little over $37,500 in my Roth, of which $29,000 was contributed by me. That means, at any point, I can withdraw $29,000 from my Roth and do with it what I please.

I allowed my frustration with the Roth to cloud my judgement. Yes, the Roth IRA is nowhere near as tax-advantageous as people like to pretend it is, but its ability to be both an investment vehicle and a quasi-emergency fund – at the same time – make it a worthwhile option.

In conclusion, I still think Roth IRAs suck, but for now it will remain in my personal finance arsenal. Here’s to second chances 😉

14 thoughts on “Eating my words”

  1. I would add that the Roth also gives you tax diversity. Let us say that tax rates in your retirement go way up; in that case drawing on your Roth could be advantageous. Or let’s say that your needs are such that drawing on a traditional IRA (and paying the taxes at that point) would stretch you, while using your Roth would be easier to handle.

    Still not quite convinced by your math, though: if you have $37.5K today after taxes in your Roth, and in 40 years it grows to (say) $200K, how is it that you are paying the same tax rate as with a tax-deferred account? With the Roth you’ve paid taxes only on $37.5K. If you have $200K and are in a 25% bracket, I would think you would be paying much less tax with the Roth. And of course after age 59.5 all that money is yours tax and penalty free. So help me out here if I’m missing something.

  2. I would throw out there an income producing ROTH (dividends or interest). Where you could get 4% yield on your ROTH. If you had the 200K in there that Larry shows above you would have 8K/year in tax free income without touching the principal. If you built the same portfolio in a traditional IRA you would be paying ordinary income taxes on that withdrawal. So there are ways to create a ROTH that is very advantagous.

  3. The idea of a “no save month” makes me cringe. At this point, we’ve been saving so much money it would be impossible for us to not save. The money just wouldn’t get spent, so it would go into savings, in your case, in December.

  4. I had a hard stop on $100,000 in savings for a house as well, but I bought a place before I hit that point.

    You could also contribute to a Roth IRA for Girl Ninja for another $5,500. I know you don’t want to have more accounts to manage, but that’s some more tax-advantaged room. But I would definitely start maxing out your TSP! It’s a pretty sweet deal and you pay less in taxes now, which makes it easier to save more than if you were just saving in post-tax accounts!

  5. Wow. If I had $100k in savings, I wouldn’t want to put $80k toward a down payment on a home. I’d either buy a less expensive home, or keep renting. I realize you probably don’t care much for my opinion.

  6. I just emptied my Roth IRA contributions (and capital gains) for the purchase of my first house. I will probably start contributing again once I’m done paying for my wedding, but it was nice that I could get to that money when I needed it.

    Every day I get less interested in retirement accounts and more interested in having liquid money, but again that’s a product of me deciding to stop saving for retirement and start building income for retirement.

  7. Check out another PF blogger’s take:
    It’s a good argument to contribute to a traditional IRA at your stage in the game.

    I working on maxing out my 401(k) for the first time this year – in monthly pre-tax $1,458 deposits. One can hope, but I think I’m in the highest tax bracket I’ll ever be in – so pre-tax makes sense for me.

  8. If it helps any, your roth bashing post didn’t keep me from contributing to mine and my wife’s. Having that much money repeatedly being diminished each year by inflation would make me sick.

    Someday I’ll have to focus more attention to funding life “pre-retirement”, but it will likely be in some investment vehicle with more of an upside than cash. Granted, there’s a liquidity trade off everyone needs to weigh for themselves.

  9. For someone whose previous post was about “hoping for the best, planning for the worse,” it seems like you’d be best served doing both — maxing out a pre-tax 401k (because you’ll get a big benefit if taxes go down in the future, plus you can save more money there due to the higher limit on contributions for 401k plans) while ALSO maxing out a Roth IRA (in case taxes go up on everyone in the future, and/or because you can access your contributions without penalty at any time).

    That way, you’ll benefit either way you choose to access/use your money in retirement.

    • I get the diversification element. But even that can be misleading as the vast majority of people find themselves in lower tax brackets come retirement since they typically have fewer expenses (no dependents, no house payment, no more retirement contributions, etc). That’s should be the primary concern in my opinion.

      • Right, B. But this guy is suggesting something a little different and more clever than what I’ve been reading so far: withdraw from your tax-deferred only as much as will match your deductions/exemptions (thus lowering your taxable income); then fill in the remaining needs with a withdrawal from your Roth. I haven’t run a test 1040 to see how this would play out in actual numbers, but it’s an intriguing idea.

        And I’m not confident about the “lower expenses in retirement” thing either: the retiree may well face increasing unreimbursed health care expenses (including long-term care if not insured); and/or may want to spend more on vacations, eating out, and so forth.

  10. I read this and the original Roth Sucks post.
    The magic of Roth is oversold in my opinion. Had you spent much time in the 15% bracket, I like the idea of Roth at 15%, but use pretax money when entering the 25% bracket.
    There’s a strange phenomenon that affects single social security recipients, a Phantom 46% tax bracket, and Roth can help them avoid that. But you are married, and I’ve seen how girl ninja looks at you. You have a long, happy marriage ahead, and social security taxation, the couple’s phantom tax zone isn’t as big a concern. When your pretax savings risks putting you into a higher bracket, Roth might help. When you and GN have a baby or several (note, for taxes, and college costs, having twins or triplets can help, instead of one per birth) you might drop to 15% for a time. Converting to Roth to top off the 15% bracket isn’t a bad idea for that year or two.

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