Short version of this question: if I have some money saved that I don’t expect to use in the next year or so, and I don’t have any non-mortgage debt to pay off – is there any reason NOT to put that savings into a Roth account?
I feel I am in okay shape in terms of retirement savings (far better than most Americans, not doing as well as the FIRE community), with 10-20 more years to go (preferably 10 years from now, depending on the market & health care). Because I”m in okay shape and max out my 401(k), I haven’t been saving in a Roth. Instead I’ve been focusing on paying down my mortgage (still about 10 years out) and enjoying my life in the moment.
I have been putting aside money in hopes of self-funding a sabbatical at some point. My vision is I’d arrange a leave of absence for up to 3 months; I’m not at all sure my employer will go for it so it’s all quite hypothetical. I’m too conservative/aware of age bias to quit my job without another lined up and I would really really like a chunk of time off. Words cannot express how I envy friends who work in academia and get summers off! (future post? brainstorming jobs that get summers off but don’t require being a teacher?)
I realized that I could set the hypothetical-sabbatical money aside into a Roth account, and pull out the contribution to use if I DO have a sabbatical, and if I don’t, then I’m that much closer to being in even-better retirement shape.
Is there any reason to NOT put my savings into a Roth? My usual tendency is to go VTSAX but I might be more conservative with this money since I would like to use it in the shorter term. Or, by putting it into a Roth, am I going to mentally classify it as untouchable?
I’ve got other money sitting in an emergency fund (combo of money market and VTSAX) and am now wondering why I haven’t put it in a Roth all along. Please advise!
If you qualify to do a regular Roth IRA without having to convert from a traditional IRA, the only reason not to would be having to deal with figuring out how to take out the principal and any other paperwork costs. For that reason it’s good to have some cash in an emergency fund (the money market in your case) in case you need money immediately without paperwork hassle (because short-term emergencies often come with mental and emotional angst and the last thing you need is a month delay because of some sort of paperwork snafu). So… I guess laziness is the main reason not to? If you’re planning on using Vanguard I doubt it will be that difficult to get your principal out (some other providers make taking any money out more of a hassle).
You can put money in VTSAX within the Roth! Though yes, within the shorter term you might want to stick it in a bond fund or something similar. The heuristic is generally to put money you think you’ll need in more than 5 years into stocks and to be more conservative with money you’ll need sooner.
If you can only do Roth IRAs through a traditional conversion (a Backdoor Roth) because you’re too high income to contribute to a Roth directly, you have to wait 5 years to access the Roth funds, at least according to this random website I found. So if you need the principal sooner than that, you might want to avoid doing a Backdoor Roth and instead save the money as taxable.
Here are some reasons you could withdraw distributions (not just principal) from a Roth without penalty. (They include things like disability, first time house purchases, educational expenses, etc.)
Grumpy Nation, is there anything I haven’t thought of? Have you ever withdrawn the principal from a Roth IRA before age 59.5?