Savings and taxes

[Anonymous]

So, I never had much of a emergency cash savings fund.  Spent the past few months getting one.

Issue- I would like to max out my IRA contribution for 2017.  The only way I will make it is to drain most of my emergency fund.  I should be able to replenish it again over the following months.

Worth it?

[Anonymous]

Is the IRA a Roth?  If so, you can withdraw the deposited funds at any time (though not the earnings).  So in the case of a Roth I would not see any drawback but do see an advantage.  Only caveat is that I'd keep the cash deposited into the Roth in a zero-risk fund while you are rebuilding your emergency fund (and it sounds like that will only take you a few months).

https://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/roth_ira/w...

[Anonymous]

It is a regular, non-Roth IRA.  Tax rate on the funds is greater than the interest of the savings accounts.

I have opted away from Roth IRA because I do not believe I will be in a higher tax bracket in my retirement years than in my working years.

It should still only take a few months to rebuild the savings.  Only real drawback would be if I lose my income.  Almost not worth asking the question to begin.  I have just never directly deposited into my IRA, only have transferred in old 401k accounts after separation.

[beutiful5678]

How much is your emergency fund and how many month's worth of expenses does it cover?

This doesn't have to be a binary decision - you can contribute half of the maximum contribution or something like that.

[DaveInAZ]

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@Anonymouswrote:

It is a regular, non-Roth IRA.  Tax rate on the funds is greater than the interest of the savings accounts.

I have opted away from Roth IRA because I do not believe I will be in a higher tax bracket in my retirement years than in my working years.

It should still only take a few months to rebuild the savings.  Only real drawback would be if I lose my income.  Almost not worth asking the question to begin.  I have just never directly deposited into my IRA, only have transferred in old 401k accounts after separation.

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Yeah, I've never understood the appeal of a Roth IRA - who the heck has a higher tax rate in retirement than during their prime working/earning years?

While the standard advice is to always maximize your savings for retirement, not all of us are in a position to do that. I always calculate what I call the "rate of return", the amount of tax savings for the amount put into an IRA. For example, last year I decided on a $2500 IRA contribution as that gave me the highest rate of return, 16% - I reduced fed tax by $400. ($400/2500=16%). I call it rate of return because instead of paying the feds $400 I paid it to myself, in an IRA.

[iced]

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@DaveInAZwrote:

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@Anonymous

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Yeah, I've never understood the appeal of a Roth IRA - who the heck has a higher tax rate in retirement than during their prime working/earning years?

While the standard advice is to always maximize your savings for retirement, not all of us are in a position to do that. I always calculate what I call the "rate of return", the amount of tax savings for the amount put into an IRA. For example, last year I decided on a $2500 IRA contribution as that gave me the highest rate of return, 16% - I reduced fed tax by $400. ($400/2500=16%). I call it rate of return because instead of paying the feds $400 I paid it to myself, in an IRA.

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I the heck will and I'm not alone. Well, to be technical, I'll have a higher income in retirement than in working years, but lower tax rate. The joys of capital gains tax rates.

That said, I currently have a minimal Roth IRA since I didn't qualify for one for many years. I did manage to qualify this year, and probably next, but then the door likely closes on me again as my largest AGI suppressor will end, so it'll never really grow the way I'd like it to.

[Anonymous]

I think to Roth or not to Roth all depends on whether someone is a proletariat or bourgeoisie.

Or, another idea.  If you are in the lowest income brackets in your working years a Roth is likely better.  You don't need the tax deductions and if you are saving, very well may be in a higher bracket when you go to retire.

Personally, I have no chance other than winning the lottery of being in a higher income bracket when I retire.  My goal is to not end up homeless and that will be hard to achieve.

[Anonymous]

Bear in mind that a person who is in his 20s or 30s now should be trying to imagine what taxes will be like at least 40 years from now.  Income taxes are very low right now.  Our national debt will be increasing sharply over the next several years.  Most economists believe that the high national debt, combined with the high cost of Medicare and Social Security, will force future generations to pay much higher taxes (not even counting the additional cost of climate change).

Another consideration is that with the Roth all one's future earnings are also tax free.   This is why young people are often urged to consider a Roth, even if they are making a healthy salary starting out.  

Here is a helpful brief article on deciding the pros and cons of a Roth, as well as an excerpt from it on the value of tax-diversification, which in this case means you don't have to view it as an either/or:

http://time.com/money/collection-post/2791206/roth-401k-vs-traditional-401k/

It’s always a good idea to make sure your retirement money is “tax-diversified,” meaning split up among accounts that are tax-deferred until retirement, and accounts that are already settled up with Uncle Sam. One way to do that is to use your 401(k) plan as a supplement to your IRA, if you have one. If you have a Roth IRA, you might want to opt for the traditional 401(k) at work. Likewise, a Roth 401(k) might be a good choice for you if you already have a traditional IRA. If your employer offers both types of 401(k)s, you can divide your savings among them.

[iv]

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@DaveInAZwrote:

Yeah, I've never understood the appeal of a Roth IRA - who the heck has a higher tax rate in retirement than during their prime working/earning years?

While the standard advice is to always maximize your savings for retirement, not all of us are in a position to do that. I always calculate what I call the "rate of return", the amount of tax savings for the amount put into an IRA. For example, last year I decided on a $2500 IRA contribution as that gave me the highest rate of return, 16% - I reduced fed tax by $400. ($400/2500=16%). I call it rate of return because instead of paying the feds $400 I paid it to myself, in an IRA.

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A Roth makes a great deal of sense for two totally different groups:

1) Those currently making very little taxable income (compared to expected income for the majority of their working life).  That's usually very young workers, but it could also be early retirees or the temporarily part-time.  This group would in many cases have a lower tax rate now than when the Roth is tapped.

2) Those currently making too much taxable income to be able to deduct a traditional IRA - there's a point where the deduction stops being available, but Roth is still a direct option.  And for years now, even if you are above the Roth limit as well, you can make a non-deductable contribution, followed by an immediate Roth conversion. (Weird loophole, but it's there...)  This group might as well take the Roth option, since a non-Roth, for them, is both non-deductable AND taxable later!

If you are in-between these two groups, then yeah, a Roth isn't all that appealing.

Currently, DW and I max out traditional 401k (her), 403b and 457b (me) accounts, and then do Roth IRAs.  But 15+ years ago, while under the traditional IRA deduction cap, I never even considered doing a Roth.  It's all about how your current financial position interacts with current (and projected) tax code...

[Anonymous]

Future taxes are a wild guess but I think they will be higher. With higher rates coming on the trillions of debt and funding the biggest ponzi scheme in history, social security, federal and social security taxes have to be higher  I know there was some talk of trying to tax these tax deferred accounts earlier