How can I feel better about contributing to my Roth IRA?

February 10, 2019 4:35 PM

How can I feel better about contributing to my Roth IRA?

I have a Roth IRA through Fidelity that I try to put money into every year (it's separate from a 403b I have through work that I automatically contribute to with every paycheck). I never remember to put money into the Roth, then at tax time I always get to the investments info part, say "oh shit!" and dump a bunch in for the previous year. I am lucky enough that I think I can afford to put in the max amount, but it feels like such a huge dump to drop ~$5k into some hole that's going to fluctuate and not even necessarily be there when I need it in ~40 years (I'm 30 now). It probably doesn't help that my Fidelity account is very separate from my other bank account and I never look at it, and when I do it stresses me out because the total amount moves all over the place, which in turn leads to me avoiding it even more!
I could comfortably put in the max and have a good amount remaining in savings and checking. Should I be maxing out the Roth contribution just because I can? How can I become ok with saying goodbye to so much money at once? I don't think spacing it out throughout the year or doing it automatically would help me because I'd still see it going away every time I look at my bank account... I'm also not super confident that I'm going to get this investment back in the future (stock market, general uninformed pessimism about US/world financial collapse) but I know I'll probably regret it at retirement time if there hasn't been some sort of apocalyptic economic event and I'll be kicking myself for not having faith in the system when I was younger.
I don't really have any immediate goals for purchasing a house or car or anything, so this money is just chilling in my savings account otherwise. I just don't feel good about putting so much money somewhere that I can't get it back!
Can you help me work through this and figure out how much to contribute for the 2018 tax year?

posted by ghostbikes to Work & Money (12 answers total)

You're in luck, because you can get it back! Roth IRAs are unique in that you can withdraw your principal without penalty whenever you want. In that way, it's a lot more flexible than your 403(b).

There are other good reasons for putting the money away now. There's the extra compounding that comes with more time. There are also income limits to a Roth - if you see yourself making significantly more in the future, there's a good chance you may not be eligible for one when you finally decide to really start socking it away for retirement.

As far as the generalized pessimism, I'm not sure I have a great way to help you deal with it. However, dollar cost averaging over a long period of time (say, the 35+ years between now and your retirement) will go a long way towards reducing risk. Not putting your money in a retirement fund like this, in my (inexpert, somewhat uninformed) opinion, only makes sense if you can't support the risk associated with the stock market - that is, you plan on needing the money within a couple years. Did you put money in your 403(b) during the Great Recession? If you're concerned about the future, why is it ok in your mind to fund that and not a Roth? These are questions that might help as you think about these things.

Finally, think about the returns (or lack thereof) you're getting with a chunk of money sitting in a savings account. Even in a high yield account, you're not beating the inflation rate - over a 30 year period, you'll be effectively losing money by keeping it in a savings account. Even if your Roth does only as well as market average, you'll come out ahead over a savings account.

For the least amount of risk and effort, I'd rethink the idea of a monthly automatic transfer to a Roth. You won't forget about it, and you'll get the benefits of dollar cost averaging. Don't bother picking stocks; Fidelity offers funds that track the major stock indices or you can go with a "targeted retirement date" fund or something similarly straightforward.
posted by backseatpilot at 4:53 PM on February 10, 2019 [9 favorites]

Yes, max out the Roth contribution every year that you can, because you are deferring income taxes, which for most people is the largest and most predictable expense over a lifetime. You can use the funds in the IRA to do things other than buy and sell stocks and bonds, too. A keyword to search for to learn more about this is "self directed IRA for real estate investment" for example. So, say you used a chunk of your IRA to put a downpayment on a house that you decide to rent out: rental income and appreciation can go back into the IRA income tax free. That could save you a lot in taxes if the home appreciates.

I think of it this way: if the whole world financial system collapses I'm fucked regardless of whether I put 5k in each year ten years ago or whatever. in that situation we would basically all be fucked. possibly all money in non cash or gold bar form could vanish. who knows! in the meantime, if things proceed apace and i get old, i know future me will be happy i avoided income tax and was disciplined about saving 5k a year.

Also: automate the contribution to the Roth! It's worth it to do this.
posted by zdravo at 4:54 PM on February 10, 2019

I just don't feel good about putting so much money somewhere that I can't get it back!
There are plenty of ways to get the money back if you really need it, as described in the Wikipedia entry and IRS publication. For example, you can take out $10K as a first-time home buyer penalty free.
posted by soelo at 4:55 PM on February 10, 2019

max out the Roth contribution every year that you can, because you are deferring income taxes
Roth IRA contributions are not tax-deductible, but those in traditional IRAs are.
posted by soelo at 4:58 PM on February 10, 2019 [10 favorites]

I don't think of a Roth IRA as a particularly risky investment option. It's no more risky than your 403b, for instance, and it's insured for up to 500k. I have a lot more faith that my Roth is going to be there in 40 years than, say, Social Security.
posted by basalganglia at 5:01 PM on February 10, 2019 [4 favorites]

max out the Roth contribution every year that you can, because you are deferring income taxes

This is not true. The money you put into a Roth IRA is after tax money, and that money, and whatever it earns, is not subject to taxes when you withdraw it.
posted by Dolley at 5:38 PM on February 10, 2019 [4 favorites]

The answer here depends almost entirely on what your Roth (and 403b) money or invested in. That's what controls the fluctuations in balance, and more importantly whether it will be worth it.

In the absence of any other information, I'd suggest a target-date fund, where the date matches your expected retirement year.

One more way to look at contributing in general is that with every year, you lose access to that 'space' once the year is over. You can't decide at age 60 that you would like all of your money to be in a Roth, for instance.

A more complex view would be that when you retire, it will be advantageous to have some money in pre-tax (403b) and some money in post-tax (Roth) space, so that you can optimize taxes on withdrawing money.
posted by Dashy at 6:19 PM on February 10, 2019 [2 favorites]

"self directed IRA for real estate investment"

This is a very bad idea for 99.8 percent of people.
posted by Dashy at 6:23 PM on February 10, 2019 [4 favorites]

This is a very bad idea for 99.8 percent of people.

More than that - real estate owned in an IRA has to be arms-length (eg hands-off), so few people will accumulate enough in theirs to purchase property and hire management for it.

There are also rules against personally guaranteeing a mortgage held in an IRA and in the case of getting a loan, you can trigger tax rules you might not expect.

In general, just don't. Almost everyone should either have a target date retirement fund for their IRA or be using the three fund plan.

I'm also not super confident that I'm going to get this investment back in the future

The odds of you not getting the investment back, particularly if you follow the above suggestions, are very, very small and so extreme that the only investments you'd have been better off with is farmland and bullets. If the economy should badly falter compared to the rest of the world, you will have time to move to other assets.

Can you help me work through this and figure out how much to contribute for the 2018 tax year?

Max it out if you can. As noted in the first comment, the really awesome thing about Roths is that you can remove the principal at any time without penalty. So if you find that dream house unexpectedly, you can pull the funds you put in this year without a problem, and any gains that have been made will continue to grow tax-free for your retirement.

The important thing with long term investing is to keep a steady hand and not panic. The people that did poorly in 2008 were the ones that sold low when they didn't need to. The people that didn't have immediate need for the money and just let it be did quite well as it recovered in the next few years.
posted by Candleman at 7:43 PM on February 10, 2019 [6 favorites]

If the fluctuation makes you anxious then reinvest the Roth funds in something more stable than stocks. Balance your entire portfolio (403b included) so that you have the right mix for your age and needs of stocks, fixed income assets, and cash (YMMV a lot by age). Use the IRA funds for laddered CDS or bonds and it will get less volatile.

What matters is your total asset allocation across all retirement accounts, including social security and any pension or annuity you might be due. At your age you can afford a fairly risk-tolerant profile (stocks prevail) but you still need some hedges (bonds, CDs, annuities). So make the Roth a quiet hedge and cash reserve. Let the 403b do the fluctuating. It’s just a mind trick - it’s all your money. But if the Roth feels more like “out of pocket” money, use it for a more stable investment — you can touch the cash if you need to, unlike the 403b. So you’ll know it’s there.

Also, if your 403b is funded by your employer, are you also making the MAXIMUM personal contribution to it each year? (18k at your age I think). In my opinion that should come first; tax deferred income is the best income for most people. And make sure you don’t leave one dollar of employer matching funds on the table.

You’re doing good. In my mid-50s I only wish I had been quite as focused on saving in my 30s as I later became. I advise anyone under 40 to save like crazy. Unless you have great faith in social security, you may need more than you think. The GOP is doing their level best to render SS insolvent.
posted by spitbull at 3:35 AM on February 11, 2019

You can use a CD or bonds instead of stock market funds for the Roth if you are really nervous about stocks, or split them. There's nothing special about the Roth as far as risk goes.

Are you maxing out your 403b? If not, I'm not sure there's much advantage contributing to the Roth instead. They'll lower your taxes at retirement, but the 403b lowers them now.

Roths, 403b, and other retirement vehicles have the advantage of being sheltered from things like college financial aid considerations, in case you have children.
posted by redlines at 8:00 AM on February 11, 2019

Another thing saving in an IRA gives you that just sticking it in post-tax saving does not is that it's protected from bankruptcy if things should go dramatically badly for you. Depending on your state, it may also be protected from lawsuits.
posted by Candleman at 10:40 AM on February 11, 2019