Question on the math.. Roth IRA, Taxes and contribution

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BrandonSi
Posts: 136
Joined: Mon Nov 26, 2007 4:19 pm
Location: Chicago, IL

Question on the math.. Roth IRA, Taxes and contribution

Post by BrandonSi »

I'm confused on an issue here, so I'm hoping someone more mathematically oriented can help me here.

I just invested the max in my shiny new Vangaurd Roth IRA for this year, but my fiancee and I are getting married next year. Right now our gross income is ~ 140k. After being married we will obviously be passing the IRS income limit to contribute to the Roth account in a few years. We plan on contributing the max every year until we're unable to do so (IRS limit), so we'll have ~ $20k sitting in a Roth IRA (2045 Target Retirement) when we pass the IRS limit. Since we can't contribute more, it's just going to sit there. Does it make sense to take that money out and put it in a low cost index fund in a taxable account, so that we can continue to contribute year after year, versus just leaving $20k in the account, and leaving it alone for ~25 years?

It seems like the real financial growth comes with consistent contributions and compound interest (at least that's what I got from the 'common sense' and 'boglehead' books) and I'm not sure that leaving the $20k in the Roth IRA and not being able to contribute for ~25 years is the right move. I'm not good on the math, so maybe it is? Any suggestions here?

Thanks again for the help :)
Live Free or Diehard
Posts: 517
Joined: Wed Jun 27, 2007 1:12 pm

Re: Question on the math.. Roth IRA, Taxes and contribution

Post by Live Free or Diehard »

BrandonSi wrote:Does it make sense to take that money out and put it in a low cost index fund in a taxable account, so that we can continue to contribute year after year, versus just leaving $20k in the account, and leaving it alone for ~25 years?
I would leave the money in the Roth IRA. It will be tax-free when you decide to withdraw it. If you leave $20k in it for 25 years and it averages 8% return you would have approximately $137k. If you average 7% return you'd still have $108k. If you average 6% you would have $86k.

You can still invest outside your Roth after you're over the limit. I wouldn't give up tax-free growth.
Topic Author
BrandonSi
Posts: 136
Joined: Mon Nov 26, 2007 4:19 pm
Location: Chicago, IL

Re: Question on the math.. Roth IRA, Taxes and contribution

Post by BrandonSi »

Live Free or Diehard wrote:
BrandonSi wrote:Does it make sense to take that money out and put it in a low cost index fund in a taxable account, so that we can continue to contribute year after year, versus just leaving $20k in the account, and leaving it alone for ~25 years?
I would leave the money in the Roth IRA. It will be tax-free when you decide to withdraw it. If you leave $20k in it for 25 years and it averages 8% return you would have approximately $137k. If you average 7% return you'd still have $108k. If you average 6% you would have $86k.

You can still invest outside your Roth after you're over the limit. I wouldn't give up tax-free growth.

Thanks, we absolutely plan on investing outside the Roth, even before we hit the IRS limit.. I just wasn't sure if adding an additional $20k to the taxable account would result in larger overall growth than not adding in that extra $20k.
sport
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Re: Question on the math.. Roth IRA, Taxes and contribution

Post by sport »

BrandonSi wrote: Does it make sense to take that money out and put it in a low cost index fund in a taxable account, so that we can continue to contribute year after year, versus just leaving $20k in the account, and leaving it alone for ~25 years?
Brandon,
No, it does not make sense to withdraw the money from your IRA. Just consider all of your investments to be one big portfolio. Having even a small part in a tax free account is better than having all of it taxable. Also, the 20K will not just sit there. It will grow over time.

Best wishes,
Jeff
Topic Author
BrandonSi
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Joined: Mon Nov 26, 2007 4:19 pm
Location: Chicago, IL

Re: Question on the math.. Roth IRA, Taxes and contribution

Post by BrandonSi »

jsl11 wrote:
BrandonSi wrote: Does it make sense to take that money out and put it in a low cost index fund in a taxable account, so that we can continue to contribute year after year, versus just leaving $20k in the account, and leaving it alone for ~25 years?
Brandon,
No, it does not make sense to withdraw the money from your IRA. Just consider all of your investments to be one big portfolio. Having even a small part in a tax free account is better than having all of it taxable. Also, the 20K will not just sit there. It will grow over time.

Best wishes,
Jeff

Wow, thanks Jeff.. That just turned another light bulb on for me. I'd never looked at it as a whole portfolio, just little parts of it.. Using that logic it makes perfect sense. I seem to be thinking too hard when it comes to the math, thanks for the tip on the big picture.
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