Should I invest in Roth IRA this year?

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EricBackus
Posts: 16
Joined: Wed Jul 15, 2015 10:30 am

Should I invest in Roth IRA this year?

Post by EricBackus » Thu Apr 14, 2016 4:13 pm

I've always invested in my Roth IRA every year, but this year I've been thinking more about it, and I'm not sure whether I really should.

This year the only money I have available for the Roth IRA would come from selling funds in my taxable account. These funds were involved in tax loss harvesting late last year. Since then, they've seen about a 10% gain. So, if I sell to transfer funds into a Roth IRA, I would realize about a 10% short-term capital gain, and pay taxes on that gain at ~25%. So, the cost to me is ~2.5% of the total Roth IRA investment. Not a lot, but then again if a mutual fund had a 2.5% front-end load, I would consider that unacceptable.

Now, I know that if I leave the funds in the Roth IRA long enough, the tax-free compounding eventually is worth more than the initial 2.5% cost. If we assume an overall investment return of 5%:

Roth value of $1 after N years: (1-0.025) * (1 + 0.05)^N
Taxable value of $1 after N years: (1 + 0.05 * (1 - 0.25))^N

From this, I conclude that Roth is worth more after around 3 years. Not bad! But, what if I retire in less than 3 years? After I retire, I think taxes will be close to zero because of the low tax rates on qualified dividends and long-term capital gains. So, I think my decision on Roth vs. Taxable should be based on how long until I plan to retire. Less than 3 years would mean the Roth is not worth it.

Am I thinking about this correctly? What would fellow Bogleheads do?

nps
Posts: 569
Joined: Thu Dec 04, 2014 10:18 am

Re: Should I invest in Roth IRA this year?

Post by nps » Thu Apr 14, 2016 4:23 pm

If you bought last year you could hold until they are long term capital gains then contribute them to Roth. You're referring to 2016 Roth contributions right?

Do you have an emergency fund or cash reserves in taxable in addition to your taxable investments? If so you could put some of those funds in a Roth.

EricBackus
Posts: 16
Joined: Wed Jul 15, 2015 10:30 am

Re: Should I invest in Roth IRA this year?

Post by EricBackus » Thu Apr 14, 2016 4:33 pm

Thanks for your reply.

This is for 2015 Roth, so I only have a few days left. :)

I have some other reserves in taxable, but they're involved in getting me a $500 bonus for opening a checking account, so I don't want to use them. I could, but I think the $500 bonus is worth more than the taxes we're talking about for the Roth investment.

nps
Posts: 569
Joined: Thu Dec 04, 2014 10:18 am

Re: Should I invest in Roth IRA this year?

Post by nps » Thu Apr 14, 2016 5:50 pm

Ok. I still think it's worth it. The money you put in Roth now will grow for more than three years no matter when you retire since you say you've always invested every year. You won't be withdrawing that final annual contribution for a long time in that case.

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