Little money leftover for Roth

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Stargazer65
Posts: 35
Joined: Tue May 11, 2021 11:52 am

Little money leftover for Roth

Post by Stargazer65 »

I'm 55, and after I contribute the max my employer matches to my 401K, I have no significant money to contribute to my ROTH. Is it worthwhile to move some of my emergency fund to my ROTH?

I would need to keep it in a money market account since I might need it later. So that being said it's not going to garner significantly more interest than it does in my taxable savings account, and the taxes on that interest are negligible anyway. So it seems to me the convenience to me of keeping it parked where it is, outweighs any small benefit of putting it in the ROTH.

Am I missing out by not shifting the money there? (I've read people talking on here about losing space in their ROTH if they don't contribute)
ImUrHuckleberry
Posts: 633
Joined: Sat Apr 15, 2017 7:44 am

Re: Little money leftover for ROTH

Post by ImUrHuckleberry »

I would do it. And then if you come into more money in the future, you can use that for the EF and invest the money that's been parked in the Roth.
retiredjg
Posts: 44825
Joined: Thu Jan 10, 2008 12:56 pm

Re: Little money leftover for ROTH

Post by retiredjg »

If you have never made a contribution to Roth IRA, I would put a little emergency fund money in there just to get the 5 year qualification clock started.

If you already have a Roth IRA, I would not put my emergency fund in there myself. However, I don't see that it could do a lot of harm either. You will need to keep up with all contributions and withdrawals carefully until you are 59.5 and it has been at least 5 tax years since your first Roth IRA contribution.
User avatar
Wiggums
Posts: 4066
Joined: Thu Jan 31, 2019 8:02 am

Re: Little money leftover for ROTH

Post by Wiggums »

Stargazer65 wrote: Fri Jun 25, 2021 6:35 am I'm 55, and after I contribute the max my employer matches to my 401K, I have no significant money to contribute to my ROTH. Is it worthwhile to move some of my emergency fund to my ROTH?

I would need to keep it in a money market account since I might need it later. So that being said it's not going to garner significantly more interest than it does in my taxable savings account, and the taxes on that interest are negligible anyway. So it seems to me the convenience to me of keeping it parked where it is, outweighs any small benefit of putting it in the ROTH.

Am I missing out by not shifting the money there? (I've read people talking on here about losing space in their ROTH if they don't contribute)
I had very little in Roth while working and I didn’t know about the backdoor Roth. You are not alone. The Roth space is valuable because it grows tax free. I would definitely open a Roth to start the 5 year clock started. The Roth space is even better when you can buy equities there. Do you have access you have access to a Roth 401k? It’s possible that you are better off with the pretax 401k right now if you cannot do both. It really depends on your situation.
Topic Author
Stargazer65
Posts: 35
Joined: Tue May 11, 2021 11:52 am

Re: Little money leftover for ROTH

Post by Stargazer65 »

I've had the ROTH with money in it for 20 years. I have not contributed for a few years now. Nor have I withdrawn from it.

If I were to put $7000 from my emergency fund this year, which is the max allowed for me, would that be available for emergencies anytime without penalty?
Flyer24
Moderator
Posts: 3254
Joined: Sun Apr 08, 2018 4:21 pm

Re: Little money leftover for Roth

Post by Flyer24 »

Just for reference, you only capitalize the first letter in “Roth”. It refers to Senator William Roth. I adjusted your title.
KlangFool
Posts: 21536
Joined: Sat Oct 11, 2008 12:35 pm

Re: Little money leftover for ROTH

Post by KlangFool »

Stargazer65 wrote: Fri Jun 25, 2021 7:31 am I've had the ROTH with money in it for 20 years. I have not contributed for a few years now. Nor have I withdrawn from it.

If I were to put $7000 from my emergency fund this year, which is the max allowed for me, would that be available for emergencies anytime without penalty?
Stargazer65,

You could withdraw your Roth IRA contribution at any time for any reason without tax and/or penalty.

Please check out this URL.

https://www.bogleheads.org/wiki/Roth_IR ... gency_fund

KlangFool
Last edited by KlangFool on Fri Jun 25, 2021 7:53 am, edited 1 time in total.
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
User avatar
anon_investor
Posts: 7465
Joined: Mon Jun 03, 2019 1:43 pm

Re: Little money leftover for ROTH

Post by anon_investor »

Stargazer65 wrote: Fri Jun 25, 2021 7:31 am I've had the ROTH with money in it for 20 years. I have not contributed for a few years now. Nor have I withdrawn from it.

If I were to put $7000 from my emergency fund this year, which is the max allowed for me, would that be available for emergencies anytime without penalty?
Yes, you can withdraw direct contributions anytime without penalty (but not the growth).
retiredjg
Posts: 44825
Joined: Thu Jan 10, 2008 12:56 pm

Re: Little money leftover for ROTH

Post by retiredjg »

Stargazer65 wrote: Fri Jun 25, 2021 7:31 am I've had the ROTH with money in it for 20 years. I have not contributed for a few years now. Nor have I withdrawn from it.

If I were to put $7000 from my emergency fund this year, which is the max allowed for me, would that be available for emergencies anytime without penalty?
Contributions are available any time tax and penalty free. So even if you don't put $7k in there, the contributions from past years are available. You just have to know (for your tax return) how much is from contributions and how much is earnings. The earnings are not available without tax or penalty at your age.

If any of the past contributions were from using the backdoor and that happened within the last 5 years, it could be a little more complicated.
Topic Author
Stargazer65
Posts: 35
Joined: Tue May 11, 2021 11:52 am

Re: Little money leftover for Roth

Post by Stargazer65 »

Flyer24 wrote: Fri Jun 25, 2021 7:34 am Just for reference, you only capitalize the first letter in “Roth”. It refers to Senator William Roth. I adjusted your title.
Thank you for that, I'd forgotten the background on the title.
Topic Author
Stargazer65
Posts: 35
Joined: Tue May 11, 2021 11:52 am

Re: Little money leftover for Roth

Post by Stargazer65 »

So for tax purposes, how would I prove that I am not withdrawing growth? If I remember right, I record the amount I would contribute this year in my 2021 tax return, correct? So is that the record that I use to show that I am only withdrawing a contribution if I end up doing that?
retiredjg
Posts: 44825
Joined: Thu Jan 10, 2008 12:56 pm

Re: Little money leftover for Roth

Post by retiredjg »

Stargazer65 wrote: Fri Jun 25, 2021 8:22 am So for tax purposes, how would I prove that I am not withdrawing growth? If I remember right, I record the amount I would contribute this year in my 2021 tax return, correct? So is that the record that I use to show that I am only withdrawing a contribution if I end up doing that?
You add up all your contributions over all the years and subtract from the current total. The difference is earnings.

This means you need to go back and reconstruct your contributions starting 20 years ago.

Roth IRA contributions are not reported on your tax return. However, tax software may keep track of it.

Withdrawals from Roth IRA are documented on Form 8606 Part III. Read the instructions for Form 8606 and look for a worksheet in the instructions to help you reconstruct your past contributions.
User avatar
arcticpineapplecorp.
Posts: 8237
Joined: Tue Mar 06, 2012 9:22 pm

Re: Little money leftover for Roth

Post by arcticpineapplecorp. »

retiredjg wrote: Fri Jun 25, 2021 8:48 am Roth IRA contributions are not reported on your tax return.
actually, aren't they listed on line 4a, but not 4b?

4a is IRA distributions
4b is taxable portion

so wouldn't it list the distribution (even if they're entirely contributions) on line 4a but not 4b?
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events.
tonyclifton
Posts: 234
Joined: Sat Feb 08, 2020 5:25 pm

Re: Little money leftover for Roth

Post by tonyclifton »

The Roth limit for your age is $7000 per year and it is use-it-or-lose it.

I would view this option as being less liquid than a savings / checking account and wouldn’t suggest doing it if you are using the emergency fund frequently for cash flow needs (monthly predictable bills) - the biggest value of a Roth is letting it sit and compound tax free which requires time.

Every dollar helps! Even $50 could turn into $200 by the time you are 70.
retiredjg
Posts: 44825
Joined: Thu Jan 10, 2008 12:56 pm

Re: Little money leftover for Roth

Post by retiredjg »

arcticpineapplecorp. wrote: Fri Jun 25, 2021 8:54 am
retiredjg wrote: Fri Jun 25, 2021 8:48 am Roth IRA contributions are not reported on your tax return.
actually, aren't they listed on line 4a, but not 4b?

4a is IRA distributions
4b is taxable portion

so wouldn't it list the distribution (even if they're entirely contributions) on line 4a but not 4b?
I'm saying that when you contribute to Roth IRA, that contribution is not recorded on your tax return. You are talking about distributions, not contributions. :happy
mikejuss
Posts: 1033
Joined: Tue Jun 23, 2020 1:36 pm

Re: Little money leftover for Roth

Post by mikejuss »

Isn't it a little risky to invest money intended for emergencies, folks? :confused
retiredjg
Posts: 44825
Joined: Thu Jan 10, 2008 12:56 pm

Re: Little money leftover for Roth

Post by retiredjg »

mikejuss wrote: Fri Jun 25, 2021 9:06 am Isn't it a little risky to invest money intended for emergencies, folks? :confused
I think the plan is to keep it in money market inside the Roth IRA.
redmaw
Posts: 295
Joined: Mon Apr 22, 2019 7:20 am

Re: Little money leftover for Roth

Post by redmaw »

Its not likely to make a big difference. It depends on how large your emergency fund outside the Roth is (i.e. how likely are you to need to get the money out of the roth), and how likely you are to have more investable cash in the future. I see 4 possible outcomes:

1) You end up using the EF that was put into Roth (refered to as REF from now on) for an emergency
2) You never need the REF, but never have enough cash to invest it
3) You eventually get enough cash flow to max your Roth contributions, but not to also rebuild your after tax EF, and
4) You eventually get enough cash flow to both max your Roth contributions and rebuild your after tax EF

Scenarios 2) and 3) are a wash, because you never end up investing the REF, so the only benefit you gain is tax savings on cash level interest...negligible. 1) you get no benefit and a bit of hassle including more complicated tax return (i.e. have document your basis to get the funds out without penalty). 4) You get extra roth space you would have otherwise missed out on.

Because you don't have a huge runway it seems unlikely you will be making significantly more in the future, and scenario 4 seems a bit unlikely unless you expect a significant change in your finances in the near future. It also seems like in that scenario you could simply put more in your 401k since you say you are maxing the match not the 401k cap. So its not a big loss to not have the Roth space available. In balance I can't see this making a big deal either way, but would tend to lean towards leaving the EF out of the Roth simply because its more convenient.
User avatar
arcticpineapplecorp.
Posts: 8237
Joined: Tue Mar 06, 2012 9:22 pm

Re: Little money leftover for Roth

Post by arcticpineapplecorp. »

retiredjg wrote: Fri Jun 25, 2021 9:04 am
arcticpineapplecorp. wrote: Fri Jun 25, 2021 8:54 am
retiredjg wrote: Fri Jun 25, 2021 8:48 am Roth IRA contributions are not reported on your tax return.
actually, aren't they listed on line 4a, but not 4b?

4a is IRA distributions
4b is taxable portion

so wouldn't it list the distribution (even if they're entirely contributions) on line 4a but not 4b?
I'm saying that when you contribute to Roth IRA, that contribution is not recorded on your tax return. You are talking about distributions, not contributions. :happy
ah, sorry for the confusion. got it.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events.
bradpevans
Posts: 660
Joined: Sun Apr 08, 2018 1:09 pm

Re: Little money leftover for Roth

Post by bradpevans »

Many people use Roth as quasi equivalent of EF
Contributions can always be pulled out, regardless of age or years the account has been open

The specific holdings in the account will have of course relate to risk / reward

Also consider there is no perfect “size” emergency fund, so swings in a Roth may or may not be troubling
exodusNH
Posts: 393
Joined: Wed Jan 06, 2021 8:21 pm

Re: Little money leftover for Roth

Post by exodusNH »

Stargazer65 wrote: Fri Jun 25, 2021 6:35 am I'm 55, and after I contribute the max my employer matches to my 401K, I have no significant money to contribute to my ROTH. Is it worthwhile to move some of my emergency fund to my ROTH?

I would need to keep it in a money market account since I might need it later. So that being said it's not going to garner significantly more interest than it does in my taxable savings account, and the taxes on that interest are negligible anyway. So it seems to me the convenience to me of keeping it parked where it is, outweighs any small benefit of putting it in the ROTH.

Am I missing out by not shifting the money there? (I've read people talking on here about losing space in their ROTH if they don't contribute)
You can always pull your contributions from Roth without penalty. If you invest in a safe asset, it's not a terrible idea because a) you can't retroactively contribute to it, and b) once you are no longer earning money (see "earned income" vs "unearned income"), you can't contribute to an IRA at all.

As you note, you need to find a safe investment. The default settlement funds are not guaranteed, but they have vary rarely "broken the buck." In the event of a financial crisis, the firm might restrict withdrawals. Most of those funds don't pay very much right now, less than a high-yield savings account. If you've got stable income and haven't had to dip into your EF in the past, you could consider a short-term US government bond fund, which will pay closer to what you get in a savings account. You do risk a bit of volatility here, but if you never wind up needing your fund, it's not a big deal.
LittleMaggieMae
Posts: 935
Joined: Mon Aug 12, 2019 9:06 pm

Re: Little money leftover for Roth

Post by LittleMaggieMae »

mikejuss wrote: Fri Jun 25, 2021 9:06 am Isn't it a little risky to invest money intended for emergencies, folks? :confused
I think there are tiers of EF money.

Money in one's Roth doesn't need to be "invested". I started out my Roth by building up 10K in just a money market fund (no interest not gonna loose the money) I was using this as 2 months expenses (part of my EF). Once I hit 10K - I started contributing to a target fund. over the years - I realized I didn't need so much in the money market so I moved 5K form the money market fund to the target fund.

OF course, over the years my Roth grew in size - I do kind of now consider at least 40K of the total balance to be my "EF". And yes, I've still got 5K in a money market fund. The other 150K is invested in a target fund.

Time is the thing here. The OP needs to look at his "Big Picture". If he has a large EF - it might make sense to start moving some of it to a Roth -7K per year. Keep it in some safe you get little interest but the amount never goes down fund/account.
Let say for 2021 the OP opens a Roth, contributes 7K (moved from his EF) and puts it some safe you get little interest but the amount never goes down fund/account. Let's also say that over the course of a year the OP finds and saves 2K in his non-Roth regular old savings account.

The OP could opt to use the 2K in his non-Roth account as part of his EF and transfer 2K within his Roth to say a Target Fund (or what is appropriate). He's still got 7K in his EF. It's just in 2 places (5K in the Roth and 2K in his savings account at his bank). And he's also got 2K growing tax free.

Let's say he does the same thing in 2022 - another 7K transferred from his EF accounts to his Roth AND in 2022 he 'saves' an additional 3K in his regular old savings account. He can now transfer another 3K within his Roth - to the target (or whatever) fund. His EF has stayed the same size (14K - 9K in his Roth and 5K in his savings account) but he's also got 5K invested money in his Roth - growing.

Perhaps in 2023 the OP will determine that the size of their EF is too big they could decrease the size by 10K. Perhaps they will use another 7K of their EF to make a contribution to their Roth - and put it in the boring little interest fund/account. They could then transfer 10K within their Roth to the target (or whatever) fund and get that money really working for them.

They haven't really risked any of the $$ they needed for their EF at this point - but they've got a bigger chunk of money invested and growing in a very tax friendly way.

This is all about time...
IT's all about the long game.
User avatar
FiveK
Posts: 11747
Joined: Sun Mar 16, 2014 2:43 pm

Re: Little money leftover for Roth

Post by FiveK »

Stargazer65 wrote: Fri Jun 25, 2021 6:35 am I'm 55, and after I contribute the max my employer matches to my 401K, I have no significant money to contribute to my ROTH.
Have you evaluated whether Roth contributions are likely to be better for you in the long run than traditional contributions?
placeholder
Posts: 4832
Joined: Tue Aug 06, 2013 12:43 pm

Re: Little money leftover for Roth

Post by placeholder »

Putting emergency fund into cash in roth and then reaccumulating it in taxable is one of the techniques some people use in your situation then as you refill the ef you can invest the roth cash.
Post Reply