Roth IRA vs Taxable Account

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Maverick44
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Roth IRA vs Taxable Account

Post by Maverick44 »

Hello All,

First just a little bit about me: I am 26 years old and am on track to retire by 40. Currently, I have my 401K set at 20% of my income, which will be more than enough to cover any of my post 59.5 year old expenses by the time I reach that age. I also have a small amount (only about $12k at the moment) in a Roth IRA and have started to put some $ into my taxable accounts (Vanguard) since I finished paying off about $60k in student loans finally (phew!) that will have to sustain me from the years 40-59.5 .

So, here's my question: Seeing as my 401K will be sufficient enough to sustain my expenses from 59.5 on, do I really need the Roth IRA as well? In general, my feeling is that I would rather take that $ out of the Roth IRA now while it is still just a small amount and the tax penalty would not be as much. I would then put that $ into my taxable account so that I could have it grow there and utilize that $ years earlier as opposed to just having access to my contributions in my Roth.

I am only just starting my financial education and while I think this is the right move for me I am open to opinions, as well as any other suggestions that anyone has.
Thanks!! :D

IlliniDave
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Re: Roth IRA vs Taxable Account

Post by IlliniDave »

A lot of it depends on what you think your tax rate is today and might be down the road. There are ways to get money out of both IRAs and 401ks without paying a penalty. If you have a single Roth acct, you can withdraw your contributions without penalty or tax if the IRA is at least 5 years old, so I'd tend to keep funding that. If your future tax rate is likely to be lower than your current tax rate, I continue to fund the 401 as well as the roth and look at the possibility of SEPP withdrawals. Anything else I'd put in taxable. You really can't go terribly wrong no matter where you put the money. If you decide to pull from retirement accts early, just be sure you are very clear on the rules. The penalty for messing up a SEPP is pretty steep.

George the original one
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Re: Roth IRA vs Taxable Account

Post by George the original one »

Considerations:
1) If Obamacare is still around in 14 years, it's nice to have money in a regular IRA to recharacterize to a Roth IRA when you need to fill in a low income year to meet the minimum income for a subsidy. As I recall, though, recharacterizations have to sit 5 years before you can touch them?
2) You can withdraw your contributions from a Roth IRA without penalty at any time. In this regard, I find it handy to have as a potential emergency fund and there are enough contributions in my Roth to meet 2-3 years expenses. I wouldn't bother withdrawing contributions you've already made until it's necessary.
3) As someone who's bridging the gap for 5 years until the employer pension is available, having 5 years of savings outside of retirement accounts is convenient for paying the bills.
4) 6 months into this gap period, I'm realizing it is conceivable I may not need to use the IRA recharacterization and I hadn't planned on that possibility!

Riggerjack
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Re: Roth IRA vs Taxable Account

Post by Riggerjack »

In a low I come retirement, you can pull money out of your 401k, put it in a Roth, then 5 years later, spend it,without paying a penalty, or income tax. Google Roth conversation ladder for details.

JL13
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Re: Roth IRA vs Taxable Account

Post by JL13 »

For low-expense lifestyles a la ERE, I can't think of any reason to fund a Roth over a Traditional IRA.

bibacula
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Re: Roth IRA vs Taxable Account

Post by bibacula »

I used a traditional IRA to lower my tax bill during my working years, then I converted to a Roth IRA after achieving FI. Roth conversions, completed over several years, can be accomplished without paying tax.

So, I'd recommend Option C, a traditional IRA combined with a tax-free Roth conversion.

George the original one
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Re: Roth IRA vs Taxable Account

Post by George the original one »

JL13 wrote:For low-expense lifestyles a la ERE, I can't think of any reason to fund a Roth over a Traditional IRA.
Not everyone can contribute to a traditional IRA and receive a deduction, whereas the Roth IRA is always available.

jacob
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Re: Roth IRA vs Taxable Account

Post by jacob »

The best way to tackle this issue for the individual is:
1) Thoroughly understand the various tax strategies (see thread above)
2a) Make a spreadsheet that considers these strategies on a year by year basis until death given the current laws. Run multiple scenarios. This does not require advanced spreadsheet skills or anything.
2b) Vary 2a to see the implications if the politics change tax brackets, etc. Be creative. Consider the worst case.

JL13
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Re: Roth IRA vs Taxable Account

Post by JL13 »

George the original one wrote:Not everyone can contribute to a traditional IRA and receive a deduction, whereas the Roth IRA is always available.
If only I ever got my income up that high! :D

jacob
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Re: Roth IRA vs Taxable Account

Post by jacob »

Haha! Yeah, first world software engineer problems ;-) ... I've briefly been in phase-out territory but never that high.

Someone should make a graph in terms of current income and future wealth on the respective axes and plot approximate where ROTH vs traditional is about optimal. If I was still blogging, I'd get right on that ...

JL13
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Re: Roth IRA vs Taxable Account

Post by JL13 »

That's a good idea, but there are so many variable to try and hold constant. We could say X withdrawal rate, but what about savings rate?

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