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Roth Accounts vs. EFund
Old 08-12-2008, 03:18 PM   #1
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Roth Accounts vs. EFund

If you have $1200 a month to allocate to two Roths and an Emergency fund, how would you do it? Include timing...

Aka, max out Roth fast and furiously early and then build Efund.
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Old 08-12-2008, 03:34 PM   #2
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I'd put a few months worth into the emergency fund then start splitting the cash between the two Roth accounts. Then go back and finish up the emergency fund to where you would be comfortable after the Roths are maxed.
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Old 08-12-2008, 03:47 PM   #3
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Well I have a plan currently that is splitting the monies, but the Roths won't get maxed out this way. Is there a fallacy with the thinking that come every April, if you have not maxed your Roth account, you should finish it off using money from your emergency fund.
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Old 08-12-2008, 03:51 PM   #4
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I'd max the roths now, then start building the E-fund. Why? you can always take it back out of the roth if you have to, so no point in waiting. When you do this make sure in the Roth you invest the "Efund" money into something that is "safe". Like a Money Market. ...

Just because the money is in a roth doesn't mean you have to invest it into stocks. Putting it into the Roth (even in a MM account) has multiple benifits.

1. If you don't have an emergency, you win because the return will be exactly the same as if you put it into the bank, only you won't be paying the taxes on it.

2. You will be less likely to use it when you have a "fake" emergency.

3. If you do have a real emergency, you can simply withdraw the money same as if it was cash in the bank.

So that is what I would do, put it into a Roth, but into a savings account/MM/3 month CD/short term investments.

The only downside I can think of is if you have to withdraw the money, and then have enough money to fund your roth again this year, I'm not sure you can.

in Jul 2008 you fully max your roth. (5K)
in Aug 2008 you pull out 5K for an emergency. (No tax/penalty)
In Dec 2008 (really Apr 2009) you have 5K to apply to your roth.

I'm not sure you can put the money in for 2008 because you already put in the max in 2008 (even though you then took it back out). I'm not a tax expert, so maybe you can, I just don't know.

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Old 08-12-2008, 03:52 PM   #5
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Well I have a plan currently that is splitting the monies, but the Roths won't get maxed out this way. Is there a fallacy with the thinking that come every April, if you have not maxed your Roth account, you should finish it off using money from your emergency fund.
If you did that, and then had an emergency, where would the emergency $ come from? Unlike Roths you won't or shouldn't need to replenish your emergency fund each year to the tune of several thousand dollars each.

So if you can't fully fund your Roths and your emergency fund hasn't been fully funded either, I'd suggest getting your eFund to its maximum first. You'll have additional $ next year to apply to your Roths as your eFund will be full.

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Old 08-12-2008, 04:18 PM   #6
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awesome, completely conflicting responses
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Old 08-12-2008, 06:05 PM   #7
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I'll second dgalbraith100. Put it in the Roth. It's available if needed in an emergency. I'm less careful about putting it into a MM account within the Roth, as long as I can get the money out in less than a week. If the market is down when I need the money, tough.
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Old 08-12-2008, 07:23 PM   #8
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awesome, completely conflicting responses
Yeah, that is why I gave you the split advice. Personally, I'd be comfortable with around $2500 in my Efund while I funded the Roths for the rest of the year until April. But I don't really know your expenses and overhead, job stability, possibility of a car-repair emergency, etc. For us, the smaller amount (a couple of months worth of your savings amount) would be fine, plus you could always get to the Roth contributions in a dire situation as some mentioned to you earlier.
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Old 08-12-2008, 07:23 PM   #9
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If you did that, and then had an emergency, where would the emergency $ come from?
Um, the Roth. You can withdraw contributions at any time.
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Old 08-12-2008, 08:50 PM   #10
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I assume this is a one year problem for 2008? Depends on what the Roths are invested in. I will give 3 examples.

1)If Roth is invested in cash, max the Roth's first to save on taxes from interest.

2) If both Roths are invested in same thing $1200 to one until maxed, then $1200 to other until maxed then e-fund. Logic here is the timing of deposits matters little, so get the max into one, then other, then EF.

3) Is what we do in our house. My Roth is a typical asset allocation of large-mid-small and international. My contribution is $625 per month, and I max out each August. If there is a santa claus rally I am not buying anything, just watching what I have go up (this is not the reason for the $625, but it is a side benefit).

Wife's Roth contribution is $400/month. Her Roth is a mix of 6 sector funds and 2 other diversified funds. At any one time we contribute to no more than 7 of the funds, always overweighting (accumulating) more of at least one sector (for example now we are accumulating financial services), once financial services moves positive (probably in mid 2009) we will overweight something else- probably tech, but maybe health care?

Because we want to accumulate, it is important that wife's Roth have contributions every month (so we can allocate money to the sector we are targeting at minimum).

Our EF is fully funded already (3 months expenses- 12k).

The $2500 extra I have (because my Roth cannot be contributed to in Sep-Oct-Nov-Dec) is allocated as follows:

$200 to wife's Roth (to max it out)
$440 to home owners association (due each January)
$500-$1000 for xmas gifts
$500-$1000 to emergency fund if we had to touch it for something

I have the flexibility to stop my Roth any month where the emergency came up, so replenish might mean no Roth contribution in May and extend the contribution/deposits to September.

I have had to stop or shift my deposits once- in 2006- because of a bill which came and was not expected in January.
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Old 08-12-2008, 09:11 PM   #11
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OK - - assuming you are beginning January 1st, 2009, you could do something like this:

January through June, 2009: 6 months @$1200/mo, $7200 to E-Fund

July 2009: $800 to E-Fund (total: $8000 in E-Fund); $400 towards the 2009 contributions to the two Roths

August, 2009 through March, 2010: 8 months @1200/mo, $9600 towards the 2009 contributions to the two Roths, Roths maxed out for 2009 at $10K

Late April, 2010 through December, 2010: 8 months @1200/mo, $9600 towards the 2010 contributions to the two Roths, Roths maxed out for 2010 at $10K

If $8000 isn't enough of an emergency fund for you to feel comfortable, then personally if I were in your shoes I would find more emergency fund money from somewhere other than your Roth contributions. I only work one job, so I would probably either cut back further on expenses or else moonlight. I don't need that big of an emergency fund, though. A lot depends on whether or not you have a mortgage (I don't), and other factors as Sarah pointed out.
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Old 08-12-2008, 10:08 PM   #12
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First of all, its good that you get different advice because it will start you down the path of learning to analyze and decide what is the best path for you, every person/family is different. Your risk tolarance is different, the risk of you losing your job, having an unforseen expense, those are different for each person. This is a good place to look at all the options and how different people handle it. Then you can deterimine what is the best way for you.

This is how I handle my Roths/Emergency Fund...First this probably isn't something you should do until you have a fairly large asset base (>$50K/100K/250K/500K/you pick).

I have a total of 5 "investment" accounts that I have direct control over. 1 taxable, 2 roths, 2 traditional IRA's. (wife/me).

1. I do not have an "emergency fund". My asset allocation is such that I have more than enough in "bond/reits/stocks/foreign/miscs...". I also keep my asset allocation based only slightly on what account the money is located. Over all it is "global" allocation across all 5 accounts. I do pay attention to taxable vs. IRA accounts and put specific things in each that make the most sense. (dividend in taxable, reits in IRA and so on).

2. I fund my R-IRA on January 2nd out of funds in my Taxable account that are invested to my selected asset allocation. During the transfer I have to sell the stock/bond fund/move cash/whatever and then transfer the cash to the Roth and purchase other or the same investments I was holding in the Taxable. This is where I usually take a moment to rebalance. The overhead on doing this is very very tiny. ($5 a trade, maybe costs me $30 a year tops, to shift things around within the 5 accounts)

----
You are at the beginning stages of investing (everybody starts there). Right now, you have two competing goals. Fund the EF, fund the Roth.

First stage, fund the Roth with every $ left, use the Roth as your EF.

Second stage, fund the Roth to max before year ends, save rest of $ left as EF, Jan 2nd, use EF to fund Roth.

Third stage, fund the Roth to max Jan 2nd, EF still funded, save rest of $ into a taxable account.

Fourth stage, fund Roth Jan 2nd from taxable, merge EF into Taxable, safe rest of $ into taxable.

Fifth stage, retire early.

-----

Basically I don't "save up" money in the bank to be put into a Roth, I invest all unallocated $$$ into my taxable account based on my asset allocation. I then transfer the money into the roths the minute I can. The quicker you can put money into a roth the faster you begin your gains tax free. At the same time, there is no point sitting on 10K of cash waiting to invest it into the Roth Jan 2nd when you can, instead invest it now, and then transfer it to the Roth Jan 2nd.

You can't "catch up" on money you failed to put in your Roth, so if you don't put money into your Roth this year, you can't put extra in next year. This is why I would recommend you fund your Roth NOW. The only place I would put $ in before is:
1. 401K up to matching $
2. 401K with good investments (hard to find)
3. Debt that has a high interest rate. (you pick what high means)

You can always use the Roth as your emergency fund if you need to. Until you have a large asset base I would be careful investing your emergency fund/Roth in stocks. If you have a $10K Roth/emergency fund and you invest it in the market and you are down 30%, 7K may not be enough to cover that emergency. As your net worth grows, you will begin to grow a taxable account, create an asset allocation that has many different invest "classes" that do not move with each other.

Once this reaches a certain size you can "merge" your emergency fund/roth into the taxable as a part of your asset allocation. Fairly quickly I would invest the Roth into stocks and call your taxable the emergency fund. You want to put your biggest growth items into the Roth since any gains there will be tax free...

So I would hold the Roth/Emergency fund only until you can fully fund your roth and build an emergency fund at the same time. While your Roth is your emergency fund, you can invest the non emergency fund portion into stocks. ie. if you have a 20K Roth balance, and you only need 10K EF, then put 10K into stock investments and hold the other 10K in something "safer" until you can build an external EF.

Once you have an 100K "emergency fund". Having it invested in stocks/bonds/reits/"anything better paying than a MM" probably isn't going to hurt you.

Laters,
-d.
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Old 08-12-2008, 10:27 PM   #13
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I agree with dgalbraith100. Keep in mind that you can't make catch-up contributions with a Roth. So if you miss a year, there's no getting it back.
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Old 08-13-2008, 03:49 AM   #14
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Split the money and allocate to each.
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Old 08-13-2008, 09:36 AM   #15
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The question was "how would you do it", not "what's the best way to do it". Knowing me, I'd fund the Roth right away and let the emergency fund slide. With $1200 excess per month, "minor" emergencies like a car breaking down or the refrigerator dying aren't going to require a dip into the fund.

I'd do my best to fully fund the Roth IRAs for the year. The timing of the Roth contributions most likely isn't going to make a substantial difference in the value of your portfolio on your retirement day, so whatever makes you sleep better.
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Old 08-13-2008, 10:14 AM   #16
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Kronk is correct, the difference would not be large putting the $ in now vs end of year. Here are some numbers to think about. (These are Wild A.. Guesses, with no real meaning other than for my amusement)

If a Roth existed 30 years ago, and you could put in 3K each year.

First case I assume you put the $ in at the beginning of the year into the S&P500 index.

You end your 30 years (today) with: $420,523

Next I assume you put your $ in at the end of the year.
You end your 30 years with: $379,287.

Now that isn't the real difference because the only difference between putting it in now vs. then is the taxes... so we have to compute what the tax would be on the two amounts. (in both cases you would really end with $420K, the differenece between the two would be taxable though.

420,523-379,287=41,236

So the difference spread out over 30 years is that you will pay taxes on 41K assume a 15% tax rate (long term gains) and contributing to your RIRA late will cost you a grand total of $6185. Now if that breaks your bank/retirement plans... then something else is wrong

Hopefully my math and assumptions aren't to wildly wrong.

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Old 08-13-2008, 12:34 PM   #17
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The question was "how would you do it", not "what's the best way to do it".
Oops!! Well then, here is EXACTLY how I would do it.

I would accumulate $5500 in emergency funds and max out both Roths, right from the get-go, either by drawing on prior savings or (assuming I had none) by employing some severe LBYM so that I had more than a measley $1200/mo to devote to these goals. Luckily, I earn enough money that I wouldn't have to get a second job (which would be another way to increase the available money).

But then, each person has his/her own style, needs, and priorities.
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Old 08-13-2008, 01:05 PM   #18
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Chiming in with dgalbraith, you can always withdraw from your Roth IRA for emergency funds, and if the volatility/risk is too high in many of the stock/equity/security funds, then just place it in a Money Market account. Very important to note that you cannot make up missed Roth IRA payments later in your life, so you got to make time work on your side with Roth IRAs.

To answer dgalbraith's question about putting in, taking out and being able to put it back in... you are not allowed to do that. Contributions per year are just the amount that goes in per year.
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Old 08-13-2008, 01:27 PM   #19
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$600 to each Roth as soon as it's available. If job is not an issue, both spouses are working, health is fine, car is in good repair, then I'd keep less in an e-fund.

Fund e-fund after hitting Roth max.

If it's a single breadwinner, or one or both jobs are in obvious danger, local economy is so bad that one couldn't get a job at Walmart if needed, car is ready to blow up, etc, then I'd fund $800 to the e-fund and $200 to each Roth.

The above for both scenarios assumes zero dollars in all three accounts.
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Old 08-13-2008, 01:39 PM   #20
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If you had a short term emergency, you could liquidate that months $1200 regardless of how you budgeted.

If you get paid on the 1st and 15th of the month, send in the Roth deposits on the 14th or 30th for example- so your current paycheck is supplying next months contributions. This gives you short term liquidity until the emergency fund is fully funded.

I worked for 11 years before my EF was fully funded. I was contributing to my 401k and Roth the whole time, and started wife's Roth before the EF had the right amount in it.
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