Should I really contribute to my Roth IRA?

[Good_Life]

So I was gearing up to make my Roth IRA contribution because that is just what I have always done. But it made me think should I really be doing this? My wife and I are pretty frugal and based on our current spending even with travel I don't see us needing more than $50k a year in retirement. With this level of expenses we would be at the 0% tax on long term capital gains when withdrawing from our taxable account. So why contribute to a Roth IRA and put restrictions on the age we can withdraw that money? I realize that tax brackets and rates can change (and undoubtedly will) and it might make sense to protect those funds in a tax shelter just in case, but with our level of expenses I am still struggling with it a little bit. We are 35 and will hopefully retire in mid to late 40's. What am I missing?

 

[RunningBum]

Just an observation, but since you say you are struggling a bit, it doesn't sound like you are really weighing saving in a Roth vs. saving in taxable, but rather saving in a Roth vs. spending.

If it really is about where to save, remember that you'll be able to withdraw your contributions without penalty after the 5 year period.

To me it's not worth really depriving yourself just to retire early unless your job is dangerous, unhealthy, or you truly hate it. Early retirement is certainly enjoyable, but working years should be at least somewhat enjoyable too. You have to decide as to what degree you are struggling and depriving yourself and if it's worth it.

 

[HI Bill]

If you've already maximized your 401(k) contribtution, a ROTH IRA gives you a way to save more now, and save on taxes later. We don't know what the tax rates, or capital gains tax rates will be in the future; while subject to debate, I wouldn't be surprised if they were increased to attack the national debt. The now large standard deduction (~$24K for a married couple filing jointly) may be lowered in the future, also.

Since ROTH contributions can be distributed tax and penalty-free at any time, they're a great place to stash cash without incurring any taxes on dividends. Only the capital gains will be taxable only if taken out prior to 5 years/59.5. (Corrected).

 

[RunningBum]

Since ROTH contributions can be distributed tax and penalty-free at any time, they're a great place to stash cash without incurring any taxes on dividends. Only the capital gains will be taxable, and without penalty after 5 years/59.5.

Capital gains in a Roth are not taxable.

 

[HI Bill]

Capital gains in a Roth are not taxable.

Sorry, you are correct. They aren't taxable as long as they stay in the ROTH for at least 5 years/until 59.5.

 

[mz44]

Sounds like you have already started a Roth previously, so the 5 year clock is already to ticking. Also you can withdraw your deposits tax free, since they were previously taxed.

 

[RunningBum]

Yes, anything above your contributions, whether via CGs, dividends, or interest, are subject to tax if you don't meet the 5 years/59.5 or an exception condition. Even all conversion money, I think, since that wasn't a contribution, so there's no special distinction about capital gains.

 

[Good_Life]

Thanks for your responses and I agree that to attempt to solve the US debt issues increased taxation in future years does seem likely. That may be reason enough. And yes I was weighing between contributing to Roth vs just putting in my taxable brokerage. Wasn't considering spending it.
For those with children who will attend college I thought of another reason to contribute to Roth in that those assets aren't counted in the FAFSA financial aid calculation, which could help with future college scholarships. Not sure how assets in Roth vs taxable investments would impact ACA subsidy calculations if at all.

 

[Perryinva]

Too many unknowns for a meaningful answer. If you always expect your living income to be low/zero tax, then a Roth is meaningless from a retirement tax standpoint, compared to a tIRA for after age 59 1/2 money. In order to retire in your 40s you hqve to be somewhat high income now, so maxing out tax deferred makes sense for use and growth for that after 59 1/2 period. Pre 59 1/2, as mentioned, it makes sense because earnings are not taxed income until withdrawal so now pre 59 1/2 useful compared to a taxable account while working. But how anyone can possibly assume they will always be married and living the same means and income from 40 and beyond is beyond my comprehension. My expectations and status at 40 weren’t even close to where I found I wanted to be and pursued (and achieved) for age 60 and beyond. A Roth is also a great hedge for a surviving spouse that may be in a low tax bracket when married and suddenly finds themselves single and in a higher tax bracket with the same expenses and lower income.

 

[Animorph]

If the Roth restrictions are too restrictive for you by all means use a taxable account. I needed a taxable account to make it to 59.5.

But the Roth seems more likely to remain tax free in the future and eliminates taxes on non-qualified dividends and other more esoteric distributions. The contribution amounts may be withdrawn any time. And your Roth contributions are limited so you can't just contribute more next year if you change your mind.

 

[gwraigty]

Too many unknowns for a meaningful answer. If you always expect your living income to be low/zero tax, then a Roth is meaningless from a retirement tax standpoint, compared to a tIRA for after age 59 1/2 money. In order to retire in your 40s you hqve to be somewhat high income now, so maxing out tax deferred makes sense for use and growth for that after 59 1/2 period. Pre 59 1/2, as mentioned, it makes sense because earnings are not taxed income until withdrawal so now pre 59 1/2 useful compared to a taxable account while working. But how anyone can possibly assume they will always be married and living the same means and income from 40 and beyond is beyond my comprehension. My expectations and status at 40 weren’t even close to where I found I wanted to be and pursued (and achieved) for age 60 and beyond. A Roth is also a great hedge for a surviving spouse that may be in a low tax bracket when married and suddenly finds themselves single and in a higher tax bracket with the same expenses and lower income.

^^^
This. We made different contribution decisions (pretax vs. after-tax) in my husband's 401k based on what he was making when we were newly married. We could not have anticipated that now, almost 27 years later, he would be making nearly 6X what he was making then. If we could have foreseen the future, our decision would have been different. As it is, despite making Roth 401k contributions for several years, the majority of his 401k (82%) is in pretax. (Remember that the company match is pretax, regardless of how you choose to contribute.)

In predicting the future now, the RMD's on the pretax portion are going to push us into a higher tax bracket. That's without having been heavily investing in stocks for much of the time. And yes, barring an unfortunate accident, one of us will be left to probably get pushed into an even higher tax bracket.

 

[kaneohe]

........................
If it really is about where to save, remember that you'll be able to withdraw your contributions without penalty after the 5 year period.

.............................................

While this is true, it is also true as HNL Bill said, that contributions can be withdrawn at any time w/o penalty.

 

[kgtest]

^^^
This. We made different contribution decisions (pretax vs. after-tax) in my husband's 401k based on what he was making when we were newly married. We could not have anticipated that now, almost 27 years later, he would be making nearly 6X what he was making then. If we could have foreseen the future, our decision would have been different. As it is, despite making Roth 401k contributions for several years, the majority of his 401k (82%) is in pretax. (Remember that the company match is pretax, regardless of how you choose to contribute.)

In predicting the future now, the RMD's on the pretax portion are going to push us into a higher tax bracket. That's without having been heavily investing in stocks for much of the time. And yes, barring an unfortunate accident, one of us will be left to probably get pushed into an even higher tax bracket.

As my "rich" dad says... "I''d rather have a tax problem, than an income problem".

 

[gauss]

Just an observation, but since you say you are struggling a bit, it doesn't sound like you are really weighing saving in a Roth vs. saving in taxable, but rather saving in a Roth vs. spending.

If it really is about where to save, remember that you'll be able to withdraw your contributions without penalty after the 5 year period.

To me it's not worth really depriving yourself just to retire early unless your job is dangerous, unhealthy, or you truly hate it. Early retirement is certainly enjoyable, but working years should be at least somewhat enjoyable too. You have to decide as to what degree you are struggling and depriving yourself and if it's worth it.

If I am not mistaken, you can withdrawal your annual Roth IRA contributions tax and penalty free at any point.

Rollover contributions, on the other hand, have various 5 year waiting periods associated with them.

-gauss

 

[Sunset]

Thanks for your responses and I agree that to attempt to solve the US debt issues increased taxation in future years does seem likely. That may be reason enough. And yes I was weighing between contributing to Roth vs just putting in my taxable brokerage. Wasn't considering spending it.
For those with children who will attend college I thought of another reason to contribute to Roth in that those assets aren't counted in the FAFSA financial aid calculation, which could help with future college scholarships. Not sure how assets in Roth vs taxable investments would impact ACA subsidy calculations if at all.

In that case, I'd put it in my Roth brokerage, all in stocks given your age and the 30+ years it will have to grow.
If you are really undecided, split the difference between the two choices.

 

[Dean56]

As my "rich" dad says... "I''d rather have a tax problem, than an income problem".

I always like this quote!! 100% agree

 

[DrRoy]

You do need a plan for funding RE prior to age 59.5, but otherwise use the Roth.

 

[RunningBum]

While this is true, it is also true as HNL Bill said, that contributions can be withdrawn at any time w/o penalty.

If I am not mistaken, you can withdrawal your annual Roth IRA contributions tax and penalty free at any point.

Rollover contributions, on the other hand, have various 5 year waiting periods associated with them.

-gauss

Yes, correct, I misspoke about the 5 year holding requirement. The contribution itself can be withdrawn penalty and tax-free any time. Earnings are much more complicated.