Category: Retirement

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ROTHS Amid Coronavirus!

Hi EnLifers!

So man, Coronavirus huh?! Crazy, we’re all social distancing, teleworking and the such. Seriously though, I feel so much for those of you out there who aren’t working due to this virus, without the ability to telework and no childcare, and for those with kids that are teleworking and homeschooling (and God forbid, you have multiples!) – I actually fall into the latter category. This whole thing is bananas!

However, I realize that generally bad situations usually have at least one good side effect or way to turn that frown upside down! So my silver lining?! STOCKS ARE ON SALE! I have had the intention of getting a ROTH IRA for THE longest time, but never executed mostly because of analysis paralysis. I wasn’t exactly sure what I needed to open a ROTH and what funds to choose and I let perfection be the enemy of good enough (more on that in another post), and now I’m almost at the point where we can’t contribute due to income limits. So due to FOMO (fear of missing out!) I finally, in early March, I took the plunge and set up 2019 ROTHS since it’s probably the last year we’ll be able to contribute. Luckily, the IRS allows you to open and contribute to ROTHS from the previous year before tax day which looks like that’s extended this year too – woohoo (gotta still do my taxes though)! Anyhow, I digress.

First, I decided to open with TD Ameritrade because I already had an account with them back from Suze Orman days when she matched or gave $50 or something for everyone that opened an account and contributed consistently. (I might be telling my age 😉) In hindsight, I would’ve gone with Vanguard because they have more of the funds I wanted. So Lesson 1 – make sure your brokerage has the funds you want. I opened the accounts (Please note you have to have individual accounts so did one for both hubby and I) and I funded from savings and our 2019 tax refund that I’d saved.

Secondly, I needed to decide what fund to buy. However, again because my analysis paralysis was starting to rear its ugly head, I didn’t invest right away. But geez! I’m SOO glad I didn’t because the stock market went haywire! I went STRAIGHT to Amazon to see if it’d fallen too! Side note: I’ve been stalking it for a while and regretting not purchasing a few years ago when it’d reached ~900$/share and I’ve been waiting for it to get back there, but it probably won’t. However it did fall to ~$1600/share this past week and I was like – yeah baby! It’s on sale and I’m buying! It’s been like $2000+ a share for a while, so I consider that win!  Now, outside of that happening though, my plan was to invest in index funds as most of the advice I read and heard on my podcasts were about index funds.  I’d saved some tabs from posts that I’d heard on Optimal Finance Daily  like this post from the Finance Twins and Dollar Sanity, which I found just through a web search. I cross referenced recommended funds and voila! I had the funds, but then the problem was that they didn’t have those funds at TD Ameritrade which is how I got Lesson 1. Anyhow, all was not lost, I found one Vanguard fund that I was interested in (VTI) which is the Vanguard Total Index fund and it seemed to be doing ok even amongst all of the stock market dipping, so I went with that. However, Lesson 2 is that if your brokerage firm doesn’t have the exact funds you are looking for, do a search and try to find like funds by searching for things like no cost etc.

The last thing is that I ended up not investing all of the funds due to the volatility of the stock market right now. I wasn’t sure if the market would fall again and I didn’t want to be all in if it did, so I’m taking it week by week, but I do plan to allocate all of the funds within a month or so. I’m glad I used this approach as even with purchases on sale, they fell again and I lost about $90, but I’ll take it. If history is the lesson, then we know nothing last forever and this bear market is no exception, so I say buy up and wait the long game. I’m pretty excited about what the future holds. And I did I mention I can also withdraw my contributions at any time, penalty free and not pay taxes or penalties on any investment earning withdrawals after age 59.5?! Exciting times and I’m glad I took the plunge even if it was in the middle of Coronavirus! Living my EnLife!  

Stay Healthy!

MK

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What is a ROTH IRA and does it make sense?

Hi EnLifers! So, we paid off the student loan!! Woo-hoo! Now on to other things. At this point, the only debt we have right now is one more student loan which is currently being paid by our employer and our house. So now our attention has turned to what to do next. One of the things we’ve discussed and I’ve heard a lot about via podcasts over the years are ROTH IRAs. What is a ROTH IRA? First, IRA is short for Individual Retirement Account, so basically it is a way/tool to save for retirement instead of or in addition to whatever plans your employer may have with some income restrictions (see this link at irs.gov for additional details).  IRAs are generally tax-advantaged in that you can deduct your contributions to the IRA on your income tax return and the IRS does not consider it income. However, when you withdraw money in retirement, you will pay taxes on those withdrawals. Now, the difference in a regular IRA and a ROTH IRA is that you pay taxes on your contributions in the present. That way, when you retire you can withdraw your money (including the growth) tax-free. There are some income restrictions with ROTHs too, basically you can’t make over a certain amount in order to take advantage of it.

So for the longest time, I’d heard that ROTHs were the way to go and now circumstances actually allow for me to contribute. The thing is, I’m not sure if it’s the best deal. Hear me out. So, I actually changed to the ROTH option at my job for a couple of years once our income situation changed. I was doing a 10% split, so 5% in the regular account to get the match and 5% in the ROTH option. This option significantly reduced my take-home pay, but ROTHs are very much encouraged by most personal finance experts and I really like the idea of not paying taxes later. However, this year, I’ve been thinking if that’s the best thing for me and my family. Right now, with young kids and lower income, we could use all of the help we can get AND I’m not so sure our income in retirement years will be more than what it is now. So for instance, if we are in a 28% tax bracket now, there’s a chance it will be lower in the future because we just earn less and are in a lower bracket or the government may actually reduce it which ACTUALLY just happened. The only thing is, plain ‘ole economics tells us that tax breaks just aren’t sustainable in the long term, so they WILL increase at some point. The question is will we be a part of the group that pays more. These are all things to consider and probably a lot more depending on your situation as there are so many nuances with both plans that I haven’t delved into.

Ultimately, I’ve decided to go back to the traditional retirement route where we contribute essentially tax free for now AND I decided to contribute the max in 2018, which actually puts me at a 14.5% savings rate which is better than the 10% I was doing with both the ROTH and traditional option. Even with increasing the savings rate, I’m still able to bring home more take home pay which helps our young family right now as we navigate pre-school and extra-curricular expenses. However, I do take some solace in having contributed to a ROTH for a couple of years which ultimately just helps to diversify our portfolio in case we need funds earlier than we can pull from our traditional accounts AND if it just so happens we’re balling out in our retirement age! LOL

What are your thoughts? What would you do?  Please share your thoughts below!