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Message
Roth IRA vs Traditional Savings Account
Posted on 2/3/14 at 12:21 pm
Posted on 2/3/14 at 12:21 pm
I've read up on a lot of the threads here that talk about Roth IRA's (along with some additional reading via additional sources on the internet) and I'm trying to learn as much as I can about where I should be putting my money as it pertains to retirement.
I'm 29, not married, no kids, full time stable employment that offers 401(k) that I contribute more than enough into to cover the employer match.
I also contribute roughly $1100 per year to my HSA to cover the deductible. I never go to the doctor, nor do I have prescriptions/medications of any sort, so I am comfortable with that amount for now.
Don't want to give away my exact salary (as someone here may wind up knowing me personally), but it's in the 30k-50k range.
No debt with the exception of my truck note.
I am currently building up savings in a traditional savings account. However, upon educating myself more and more about Roth IRA's, I found that the Roth may be a better option. I would also be maxing it out ($5500).
My question to you fine individuals on MT is, why wouldn't everyone choose a Roth IRA over traditional savings (if you meet the basic/standard requirements)?
ETA: Also, what are some qualities/qualifications I should be looking for when deciding to open an account (fees, minimums, etc...)
I've read that Vanguard and Fidelity are two of the more reputable choices.
Disclaimer: I am certainly not an investing guru nor am I extremely savvy when it comes to stocks, bonds, mutual funds, etc... (yet)
I'm 29, not married, no kids, full time stable employment that offers 401(k) that I contribute more than enough into to cover the employer match.
I also contribute roughly $1100 per year to my HSA to cover the deductible. I never go to the doctor, nor do I have prescriptions/medications of any sort, so I am comfortable with that amount for now.
Don't want to give away my exact salary (as someone here may wind up knowing me personally), but it's in the 30k-50k range.
No debt with the exception of my truck note.
I am currently building up savings in a traditional savings account. However, upon educating myself more and more about Roth IRA's, I found that the Roth may be a better option. I would also be maxing it out ($5500).
My question to you fine individuals on MT is, why wouldn't everyone choose a Roth IRA over traditional savings (if you meet the basic/standard requirements)?
ETA: Also, what are some qualities/qualifications I should be looking for when deciding to open an account (fees, minimums, etc...)
I've read that Vanguard and Fidelity are two of the more reputable choices.
Disclaimer: I am certainly not an investing guru nor am I extremely savvy when it comes to stocks, bonds, mutual funds, etc... (yet)
This post was edited on 2/3/14 at 12:25 pm
3
Posted on 2/3/14 at 12:28 pm to dcrews
First,
Second, the reason I have money in a "savings" account if you will, is solely for emergencies. I can literally make a couple of clicks from a computer or phone, and have money from my "savings" into my checking if shite was to hit the fan or I needed it. Pretty sure you could not do that from a Roth.
Aside from my "savings" account, which is an emergency fund, all of my other savings are tied up in investments.
quote:
I am certainly not an investing guru nor am I extremely savvy when it comes to stocks, bonds, mutual funds, etc... (yet)
Second, the reason I have money in a "savings" account if you will, is solely for emergencies. I can literally make a couple of clicks from a computer or phone, and have money from my "savings" into my checking if shite was to hit the fan or I needed it. Pretty sure you could not do that from a Roth.
Aside from my "savings" account, which is an emergency fund, all of my other savings are tied up in investments.
Posted on 2/3/14 at 12:29 pm to dcrews
Traditional savings?
Roth is a tax advantaged retirement account. Tax free growth in it as long as you follow the rules
Roth is a tax advantaged retirement account. Tax free growth in it as long as you follow the rules
This post was edited on 2/3/14 at 12:36 pm
Posted on 2/3/14 at 12:37 pm to OnTheBrink
quote:
Second, the reason I have money in a "savings" account if you will, is solely for emergencies. I can literally make a couple of clicks from a computer or phone, and have money from my "savings" into my checking if shite was to hit the fan or I needed it. Pretty sure you could not do that from a Roth.
How long would it generally take to get the contribution portion of your Roth back into a checking account for emergency use?
Your reason makes sense for immediate emergencies. But let's say I need to have a vehicle repaired or something comes up where I don't necessarily need the money right this second but in a few days or a week from now. I can't imagine it takes too long to have that money transferred from a Roth into a checking account. (obviously I could be very wrong)
quote:
Traditional savings?
Roth is a tax advantaged account. Tax free growth in it as long as you follow the rules
Right, this is what would make me think it makes more sense to have the Roth than the traditional savings. If I need the money for something, I can just pull it out (transfer) like I would if I had a traditional savings account.
This post was edited on 2/3/14 at 12:38 pm
Posted on 2/3/14 at 12:39 pm to dcrews
Only what you put in though. Can't take out more than that
Posted on 2/3/14 at 12:42 pm to dcrews
Not sure, but I would guess a couple of days at a minimum.
Why would you want to pull money out of a Roth for an oil change and new tires?
Why would you want to pull money out of a Roth for an oil change and new tires?
Posted on 2/3/14 at 12:52 pm to dcrews
A traditional savings account would be a general low yield account held by a bank on which you paid taxes on the cash and are free to draw the money on as needed.
A traditional IRA functions in that you don't pay federal income taxes on the money (state have their own laws for their own income taxes) you contribute to it. So if you put $4K in a traditional IRA, you'd deduct it on your income tax forms. So when you deduct the $4,000 on your income tax form, your income decreases by $4,000 and if you're in the 25% income tax bracket, your tax liability (or refund) would be $1,000 higher ($4,000 times 25%). Then the money in the traditional IRA would grow tax free until you withdraw it from the account.
If you open a traditional IRA, you can't pull the money out until you reach retirement age (and then would be subject to income taxes). If you pull it out prior to retirement age you have to pay income taxes to the government as well as a 10% penalty to the government (there are a handful of exceptions where you just pay income taxes on it an no penalty). There are also income limitations where you're phased out (or limited)in the amount you can contribute up to a certain income and then if you're income is over a certain amount, the government won't let you contribute to a traditional IRA. Bonuses or capital gains in addition to your salary could put you into the phase out range or keep you from contributing to it at all. I unknowingly contributed over my phase out limit (I didn't know about that rule when I filed my taxes) and got hit with an IRS tax bill 2years later.
In a Roth IRA, you pay federal taxes on what you contribute today. The money grows tax free until you withdraw it and it is then not subject to income taxes. I believe if you keep the money in the IRA for 5 years, you are able to withdraw the principal (contributions and not earnings on contributions) without penalty or paying income tax. It does have phase out limits as well, but the income thresholds to hit those phase out limits are much higher on a Roth IRA than a traditional IRA. I believe Roth IRAs can be inherited and as long as the money grows in it, it is tax free to the heir(s) and their distributions from it upon liquidation would be tax free as well.
A traditional IRA functions in that you don't pay federal income taxes on the money (state have their own laws for their own income taxes) you contribute to it. So if you put $4K in a traditional IRA, you'd deduct it on your income tax forms. So when you deduct the $4,000 on your income tax form, your income decreases by $4,000 and if you're in the 25% income tax bracket, your tax liability (or refund) would be $1,000 higher ($4,000 times 25%). Then the money in the traditional IRA would grow tax free until you withdraw it from the account.
If you open a traditional IRA, you can't pull the money out until you reach retirement age (and then would be subject to income taxes). If you pull it out prior to retirement age you have to pay income taxes to the government as well as a 10% penalty to the government (there are a handful of exceptions where you just pay income taxes on it an no penalty). There are also income limitations where you're phased out (or limited)in the amount you can contribute up to a certain income and then if you're income is over a certain amount, the government won't let you contribute to a traditional IRA. Bonuses or capital gains in addition to your salary could put you into the phase out range or keep you from contributing to it at all. I unknowingly contributed over my phase out limit (I didn't know about that rule when I filed my taxes) and got hit with an IRS tax bill 2years later.
In a Roth IRA, you pay federal taxes on what you contribute today. The money grows tax free until you withdraw it and it is then not subject to income taxes. I believe if you keep the money in the IRA for 5 years, you are able to withdraw the principal (contributions and not earnings on contributions) without penalty or paying income tax. It does have phase out limits as well, but the income thresholds to hit those phase out limits are much higher on a Roth IRA than a traditional IRA. I believe Roth IRAs can be inherited and as long as the money grows in it, it is tax free to the heir(s) and their distributions from it upon liquidation would be tax free as well.
This post was edited on 2/3/14 at 1:10 pm
Posted on 2/3/14 at 12:53 pm to meldawg399
Can we sticky this? 
Posted on 2/3/14 at 12:57 pm to dcrews
Are you asking which is better for saving for retirement or which is better for an emergency fund?
Posted on 2/3/14 at 1:02 pm to jimbeam
quote:
Can we sticky this?
I'd like a couple other more tax-savvy folks than myself to look it over first and maybe cut the part about my own personal tax mistakes.
I think they're both tax-advantaged, just in different ways. Traditional IRA, you save your highest income tax bracket on the top, so in my example of putting $4,000 in a traditional IRA, you really contributed $2,760 cash (baking in tax savings based on the 25% federal income tax bracket and in the case of LA 6%), but invested $4,000 to compound until you retire.
With the Roth, assuming the government doesn't change the current rules, it grows tax free and can be inherited without generating a tax liability.
The important thing is to sock money away now while single, because it'll be a great deterrent with the tax laws from keeping an eventual old lady from spending it on shopping.
This post was edited on 2/3/14 at 1:04 pm
Posted on 2/3/14 at 1:03 pm to GoCrazyAuburn
quote:
Are you asking which is better for saving for retirement or which is better for an emergency fund?
That's how I took it, hence my somewhat smartass of a reply. To me, it would just be silly to use a Roth as an emergency fund, for something as simple as vehicle repairs. I am sure there are other factors in which it would make sense, but the OP specifically used vehicle repairs as an example.
Posted on 2/3/14 at 1:08 pm to OnTheBrink
quote:
vehicle repairs as an example.
If you have a Goodyear card used at one of their stores, they'll usually do a 6 month, 9 month, or 12 month no interest offer depending on how much you spend. Could also use a balance transfer offer from a credit card for it. paying a simple one-time 3% or 5% fee is much cheaper than paying the 10% tax penalty on withdrawal of a traditional IRA + 25% federal and 6% LA income tax. Or paying penalties on a Roth IRA withdrawn in the 5 year window.
ETA: if you withdraw from an IRA, you lose compounding time too if you plan to replenish it.
This post was edited on 2/3/14 at 1:09 pm
Posted on 2/3/14 at 1:15 pm to OnTheBrink
quote:
That's how I took it, hence my somewhat smartass of a reply. To me, it would just be silly to use a Roth as an emergency fund, for something as simple as vehicle repairs. I am sure there are other factors in which it would make sense, but the OP specifically used vehicle repairs as an example.
Agreed. Not even factoring in the opportunity cost of removing that money from the market.
I understand some people don't like the idea of having any of their money just sitting in a low interest account, but speaking from experience of having to use my emergency fund for some real emergencies, I was very glad I had it where I did.
Posted on 2/3/14 at 1:17 pm to meldawg399
This is a good explanation, but I'd like to add a couple points.
First, with a Roth IRA, contributions are available for withdrawal at any time, not only after 5 years. The 5 year rule only applies to tax free distributions at retirement.
The basic differences between Roth and Traditional are when you are taxed and at which rate. With the Roth, you are taxed today at today's tax rates (based on today's income). With Traditional, you are deferring that tax to the date of withdrawal. If your income (and subsequent tax rate) at retirement exceeds that of today, a Roth vehicle would have provided tax benefits.
As for why a Roth over a Savings account, there may be several reasons. Liquidity and availability, potential loss of principal (if I kept my Roth contributions in cash/low yield/risk, I'm not getting much advantage), no income or contribution limits. I believe everyone should be tax diversified and have funds available to cover anything that arises. A Roth does offer the advantage that contributions are available for withdrawal which may encourage you to use it first.
At your income level, a Roth sounds like a good option. However, if you consider minor "vehicle repairs" an emergency, you should probably split some funds into a savings account to cover those small unpredictable expenses.
First, with a Roth IRA, contributions are available for withdrawal at any time, not only after 5 years. The 5 year rule only applies to tax free distributions at retirement.
The basic differences between Roth and Traditional are when you are taxed and at which rate. With the Roth, you are taxed today at today's tax rates (based on today's income). With Traditional, you are deferring that tax to the date of withdrawal. If your income (and subsequent tax rate) at retirement exceeds that of today, a Roth vehicle would have provided tax benefits.
As for why a Roth over a Savings account, there may be several reasons. Liquidity and availability, potential loss of principal (if I kept my Roth contributions in cash/low yield/risk, I'm not getting much advantage), no income or contribution limits. I believe everyone should be tax diversified and have funds available to cover anything that arises. A Roth does offer the advantage that contributions are available for withdrawal which may encourage you to use it first.
At your income level, a Roth sounds like a good option. However, if you consider minor "vehicle repairs" an emergency, you should probably split some funds into a savings account to cover those small unpredictable expenses.
Posted on 2/3/14 at 1:28 pm to OnTheBrink
quote:
I can literally make a couple of clicks from a computer or phone, and have money from my "savings" into my checking if shite was to hit the fan or I needed it. Pretty sure you could not do that from a Roth.
Actually, you can provided your Roth is with the same institution as your checking account. Or at least I can at Schwab.
That said, for small stuff (like a couple hundred to fix my car, etc.) I just put it on my credit card and pay it off at the end of the month. If I'm constantly tapping an emergency fund it probably means I'm using it for more than real emergencies.
But yes, I go with the Roth >>> savings account. In the early years the tax advantage doesn't much matter but it does build with time.
Posted on 2/3/14 at 1:30 pm to foshizzle
Yea, most Roth's you can do that.
Heck, what rarely gets said in these threads is why not do both? Have a month or two in a savings account and the rest in a Roth. Hooray best of both worlds
Heck, what rarely gets said in these threads is why not do both? Have a month or two in a savings account and the rest in a Roth. Hooray best of both worlds
Posted on 2/3/14 at 1:45 pm to foshizzle
quote:
Actually, you can provided your Roth is with the same institution as your checking account. Or at least I can at Schwab.
Good to know.
To me, my stance remains, just seems like a lot of work for small, one-time expenses.
Posted on 2/3/14 at 1:46 pm to GoCrazyAuburn
quote:
Heck, what rarely gets said in these threads is why not do both? Have a month or two in a savings account and the rest in a Roth. Hooray best of both worlds
Exactly!
Posted on 2/3/14 at 2:04 pm to GoCrazyAuburn
quote:
Heck, what rarely gets said in these threads is why not do both? Have a month or two in a savings account and the rest in a Roth. Hooray best of both worlds
What are the benefits of a traditional savings account that you don't get with a Roth?
That's my main point. If I can withdraw money from a Roth without penalty (from the contribution portion only), why even have a traditional savings account?
I wouldn't be using it for oil changes, tires, etc.. as I already budget for "minor" things like that. But if an emergency happens where I need a few thousand dollars...if I have a savings, I would just take it from that. If I had a Roth, I would just as easily take it from that. What's the difference? I see no advantages offered by a traditional savings account that I don't get with a Roth. I could very easily be missing something as I'm still trying to educate myself.
ETA: Also, thanks for all of the info guys. It's really helpful
ETA2: Missed a post earlier that answered a large portion of my question.
This post was edited on 2/3/14 at 2:08 pm
Posted on 2/3/14 at 2:07 pm to dcrews
quote:
How long would it generally take to get the contribution portion of your Roth back into a checking account for emergency use?
I would suggest building an emergency fund in a linked savings account that you can access quickly instead of worrying about using a Roth for emergency purposes.
Once you are satisfied with that safety net look into maxing out the Roth.
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