Should I contribute to my Roth IRA this year?

[NewBlood]

Sorry if this is a stupid question, but I could use some feedback...

I haven’t put any money into my Roth IRA for 2020 yet. I didn’t have enough cash on hand when the market was tanking (I wanted to rebuild my cash buffer after some high relocation expenses). I’m not at a point where I would trust myself to invest in individual stocks, so my investments are in index funds. This might change in the future but not this year. As far as I understand things (please correct me if this is wrong), bonds should be in pre-tax accounts and foreign investments should be in brokerage accounts to take advantage of the foreign tax credit. So that leaves mostly US stocks for the Roth IRA.

Even with the ridiculous highs we are seeing right now, I think it makes sense to max out my pre-tax 457b account (I'm doing 1/3 cash, 1/3 bonds, 1/3 total US market, though), but is there really any advantage to also fund a Roth in this environment? I guess I could fund it, leave the money in the money market account, and allocate it later if prices become more in line with reality? (market timing, I know, but this is looking bonkers...)

Any thoughts on this? Thanks!

[Cheepnis]

I would say that making sure to take advantage of this year's contribution limit is fairly important if for no other reason than Roth money commonly factors in heavily to drawdown strategies. It doesn't accumulate as fast since the limit is so much lower than a 401/457 so making sure to stash away 6k each year becomes more important.

I'm still making my $500/m contribution to VTI. I personally don't find it hard to put the IRA/401k money into stocks, even with the current overvaluation, simply because I can't get at it anyway. I have wussed out and stopped making my monthly brokerage contributions, opting to hold it in cash instead. That fits in with my general goal of accumulating a down payment for a house, so it more or less works out.

[IlliniDave]

Not really enough information.

The primary thing I look at is tax rate now versus best guess at tax rate in retirement. Mine will go from high now to low later, all things being equal. So Roth doesn't make sense.

Nothing really wrong with bonds in a Roth, still the same calculation re taxes. There are disadvantages to to bonds in a taxable account.

If you are really asking is now a favorable time to invest, your timeline might answer that. If you have decades before you'll be spending the money, that makes current prices a little less of a factor. I'm on the cusp of cutting the cord so I haven't funneled more than a token amount of new money into stocks over the last few years, just a little rebalancing. The foreign tax credit isn't huge as a % of NAV usually, and likely gets swamped by ongoing taxes on dividends and capital gains in a taxable account. Almost all my foreign equities are in a 401k.

But in these uncertain times, nothing wrong with keeping a little larger cash reserve or paying down debt or whatever. The only regret is if you forego tax advantaged opportunities for 2020, it's that much less you can shelter over you working life.

[OTCW]

I hold mostly REIT ETFs in my Roth account. They are down as an asset class right now, so if you interested in them, it is not the worst time to buy some.

[NewBlood]

Thank you all for your responses!

@Cheepnis, I agree, I don't really have a problem continuing my contributions in pre-tax accounts, since I can't touch it anyway. Like you, I've stopped anything going to my brokerage, I've even withdrawn a chunk of it in Feb when things weren't making any sense. With he Roth, though, since I can withdraw my contributions anytime, I'm more hesitant...

[NewBlood]

@IlliniDave, I also expect to have a lower tax rate later than now. Right now, I'm targeting end of 2022 for at least semi-ERE. So not a huge time horizon.
Thanks for clarifying the bonds question, I got mixed up there. I guess I could just put stuff in bonds in my Roth for now and reallocate later if stockss become cheaper again. Should be a better return than savings accounts. Amex high yield savings account's API got slashed 7 times since March from 2-ish% to now 0.8%

Your last sentence makes me rethink whether I should also contribute to my 403b (I will next year, but this year is weird). I can shelter up to 36k a year in this new job (403b + 457b), which is awesome, but all in accounts I can't easily access. At least for 5 years after I stop working. I already have more than 50% of my NW in there, which sucks if I want to buy a house soon after pulling the plug.

Lots to think about...

[NewBlood]

@OTCW, thanks for the tip!
I'll look into it. I don't have any REITs, because I don't really know anything about them yet. I need to get on it.
Looking at things, I'm pretty pessimistic about the future of real estate for the short to mid-term though. Do you think commercial real estate is ever going to rebound?

[IlliniDave]

...
I guess I could just put stuff in bonds in my Roth for now and reallocate later if stockss become cheaper again. Should be a better return than savings accounts. Amex high yield savings account's API got slashed 7 times since March from 2-ish% to now 0.8%

Your last sentence makes me rethink whether I should also contribute to my 403b ...

Seeing as you are potentially fairly close to ceasing work, then the question arguably boils down to what sort of gap you have to bridge until you get to your preferred time to start tapping the tax-advantaged accounts. I still max out my 401k and do a backdoor Roth conversion, but I dump an even larger amount into my after-tax Vanguard account. I don't like administrative hoops and favor a simpler/cleaner plan to just leave all the retirement accounts alone until I am a few years past "normal retirement age" (a 14-year gap is what I've built into the plan). That there are ways to get into pre-tax savings ahead of time is fine for having contingency options, but I'm too lazy to make them pillars of my plan. I've got enough in my taxable account now to cover twice what I anticipate having to pull out of the stash for the rest of my life, which of course is overkill, but several years back when it looked likely I would be an involuntary early retiree that was a pretty big concern for me--having to dive right into retirement funds in my early 50s.

My taxable account is part of a brokerage account along with my li'l Roth, but for a brokerage account it (the taxable part) is a very unsexy one. A big pile of cash (MM fund), a good dollop of tax-exempt bonds, and a smattering of stocks (in index mutual funds).

If you decide a Roth contribution is appropriate for you (have until next April 15 to decide) you could even just leave it in cash or some cash equivalent if short-term volatility could squeeze your retired lifestyle, and like you said, change course if the situation warrants down the road. My Roth, which I will probably never tap, is my spot to throw caution to the wind. That's driven by its role in my plan, not the fact it's a Roth account.

[NewBlood]

@IlliniDave, yes, I am going to mull this over a bit more since I have time until April, but I think I will eventually invest in some low-risk things in my Roth this year.

Right now, i'm figuring about $1500/month expenses in ERE. That should be on the conservative side of things if I move back to my home country, where the cost of living is quite lower than here. With the caveat that the USD to EUR conversion might not be in my favor, and will keep changing up and down over time in ways I can't predict.

If I quit at the end of 2022, I should have about 13 years of expenses from my pre-retirement bucket out of the 19 years before I can access my pre-tax money (and 24.3 years all buckets combined). That's assuming zero capital gain (but also no big drop....), so it probably will be more. Hopefully. If I can convince my employer to let me work from my home country, I would definitely keep the job a year or two longer to have more buffer.

I'm not trying to be overly conservative at this point. It's hard to estimate expenses in a different place and I'm not trying to never work again, rather to not have to work unless it's the perfect situation for me. But in a couple years, (to be reassessed based on how things actually look like by then), I expect that I'll have enough to feel confident enough for a major life change with lots of uncertainty. $1500/month is below the minimum wage in my country, so I can't imagine that in the next 19 years, I wouldn't be able to come up with enough income to bridge the 6 years gap, either through work or conversions to Roth.

If I work two more years until the end of 2024, assuming no raise and no interest/capital gains, I'll be at 17 years for a 17 years gap (and 31 years all buckets combined). Thanks for bringing this up, I really needed to go through this exercise to have a clearer picture. It's gonna be interesting to see how those numbers evolve over time.

I started reading your first journal. You are one prolific writer!

This sentence from 2014 really resonated with me:

Thinking is easier than living, I now realize. And, it takes less courage.

So true

[IlliniDave]

Right now, i'm figuring about $1500/month expenses in ERE. That should be on the conservative side of things if I move back to my home country, where the cost of living is quite lower than here. With the caveat that the USD to EUR conversion might not be in my favor, and will keep changing up and down over time in ways I can't predict.

Relocating to another country is a complexity I have not had to consider. There are some winkles going state-to-state in the US, but they are easier quantify, I think.

You seem to have given things a lot of thought, which is good. Keeping employment as an option after retirement gives a lot of flexibility.

[JackMoore1965]

in more detail what problems? it seems to me that everything can be solved