Screw my Roth (yeah I just said that)

When I graduated college in 2007 I promised myself I would fully fund my Roth IRA every single year. We are in 2012 now, and so far, I’ve stayed true to my word. BUT NOT FOR LONG. One of my resolutions for 2013 is to STOP contributing to my Roth IRA.

That’s right, I’ll probably never contribute to my Roth IRA again. Like ever.

If you’ve read my blog for a while you’ll have seen many a posts where I confess my undying love for Roth IRA’s, like this one six weeks ago. The more I think about it, however, the less convinced I am that it’s the right place for my money.

Girl Ninja and I are in the 25% tax bracket. Looking at historical averages, we will likely remain in the 25% tax bracket for a very long time, likely our entire working lives. I could nearly double my already decent salary, and we would still be in the 25% tax bracket.

What’s more, I don’t necessarily think the government will attack the middle class anytime soon. Politicians argue about the richest and poorest people in America, not us middle-classers. Republicans want to cut entitlement programs, and Democrats want to tax the wealthy. That’s the way it’s been, and the way it will continue to be. When’s the last time you heard someone run for president say “I want to stick it to the middle class”?

Let’s say the government does get greedy though. My taxes could theoretically go up at some point in the future, but guess what, Roth IRAs could also be taxed at some point in the future. Roth IRA’s were made for the middle class. Literally. (A single person making more than $125K and a married couple earning more than $183k aren’t even allowed to contribute to a Roth because, by the government’s standard, they make too much.)

So if the government would wage war on the middle class by increasing their income tax obligation, why wouldn’t they wage war against the middle class by taxing Roth IRAs? Heck, they’d likely go after the Roth first since that would only piss off a portion of Americans (those who actually have a Roth) as opposed to enraging the entire middle class. (note: I don’t think the Roth will be taxed at any point, FOR THE SAME REASON I don’t think middle-class taxes will increase, it would be political suicide).

If taxes aren’t likely to increase for the middle class, and I have no reason to believe I’ll be in a higher tax bracket come retirement, I see no benefit to a Roth IRA.

Why give the government more than I have to?

Last night, I logged in to my 401k plan and upped my contributions by exactly $6,667 annually (this pretax amount is equivalent to $5,000 after taxes…the amount I would have put in my Roth). This increased my 401k contributions from 8% to 16%. Who knows, if I’m feeling crazy I might even try to max it out to a full $17,000 annual contribution.

I don’t hate my Roth. I’ll continue to let what money is in there grow tax-free, but I’ll probably never contribute to it again.

And regardless of the things I’ve said in the past, you might want to consider kicking your Roth IRA to the curb as well.

To further prove the point here was a blurb from a comment below:

“If you are in the 25% tax bracket and contributed $100 to a Roth IRA and it grew 10% you would be able to withdraw $110 tax free (let’s ignore the 5 year rule etc). For the 401k if you contributed $133.33 (which works out to $100 pretax: $100 / 0.75) and it also grew 10% you would have $146.67, and after paying 25% taxes it would give you $110, which is the exact same as the Roth IRA.”

p.s. If you want to disagree with me, or call this decision stupid, use MATH to back your claims up. If my tax bracket is not higher in retirement, the Roth benefits are significantly diminished.

I want Girl Ninja to be poor when we’re old.

I’ve blogged many a times over the years about my Roth IRA and the quasi-obsession I have with making sure I always max it out. Since I love my Roth so much, you would think I would be just as eager to open one up for Girl Ninja. Not so much the case. Homegirl ain’t got no Roth. 

Why you ask?

Is it because I hate her and want her to be poor when we’re old?

Is it because I want her to be financially dependent on me so she doesn’t leave me for some other dude?

Or is it that I’m lazy and just haven’t gotten around to it yet?

I pick option D…. None of the above. 

We, the Ninja household, personally believe starting a Roth IRA for Girl Ninja would be overkill. Yes, overkill. Here’s why…

1) I believe investing 15% of our gross investment for retirement is sufficient.

Could we invest 20%, 25%, or 30% of our income? Sure. But why do we need $10,000,000 waiting for us when we are 65? I’m a firm believer there is a such thing as OVER-investing. 15% diversified through a handful of Vanguard Mutual funds should do just fine over 40 years.

2) I believe historical averages will remain relatively consistent.

Sure the markets could tank and the returns we’ve seen the throughout history could go away. But if they do, guess what? My retirement portfolio is going to be the least of my worries. Having food, water, and ammunition would be top of my priority list.

I mean, most Americans don’t put away 3% let alone 15%. I should, by default, be better protected than the vast majority of my peers. If my 15% invested over 40 years can’t get me by in retirement, I don’t think 20% or 30% would have made me any better off. How you invest (diversifying, consistency, etc) is often more important than how much you invest.

3) We aren’t being reckless.

If anything, we are probably saving too much. It’s taken me five years to build up my retirement portfolio, but it’s only taken Girl Ninja and I 2.5 years to amass an equal amount in our savings account. Heck just last week we put $2,000 in to a taxable investment account so we could start saving for shorter terms (10-15 years). Sure, we could have put that in to a Roth instead, but thinking about having some excess liquidity in our 40’s is hardly irresponsible.

I get that many of you worship your retirement accounts and contribute excessive amounts to them religiously. That’s great. You’ll be hella rich when you’re in your 70’s. That’ just not how we roll or what we want for ourselves. Retirement is cool, but so is saving, investing for the short-term, and…GASP… enjoying some of our money in your 20’s.

$5,000 poorer, but not really

I cringed as I transferred $5,000 out of our checking account yesterday. That money looked so pretty, sitting there all happy, waiting for its turn to venture to the land of ING, where it would live comfortably amongst our various savings account. But this chunk of change had a different future. A less glamorous, albeit still important, destiny.

As much as it hurts taking money out of savings/checking to put it in to a retirement account –specifically our Roth IRA– it’s the right thing to do. Or at least that’s what the PF gurus say.

Dave, Suze, Jim

I learned about Roth’s shortly after I graduated college in 2007. Upon learning of their many benefits, and few drawbacks, I promised myself I would fully fund my Roth every year. No excuses. Five years later, I’ve stayed true to my word.

Contributing to my Roth used to be more exciting. Probably because when your account balance is $5,000, and you add $5,000 more following year, you get to watch your investments literally double overnight. But now that my contributions are a fraction of the overall account balance, I just get bitter that I have to take money out of checking.

Stupid brain making me think stupid things. 

I know the benefits of contributing to a Roth are huge for someone my age. Investing from age 25 to 35, and then never again, will leave me wealthier than a 35-year-old who contributes $5,000 every year until age 60. The 35-year-old would put in over double my contributions and STILL come out hundreds of thousands of dollars behind me come retirement.

If you are a 20-something reader of PDITF and you HAVEN’T contributed to a Roth IRA before, it’s time you put down your iPhone 5 and Starbucks, and get yo shizz together. Your future self-will thank you for it.

Creeping on your retirement.

 

I was checking my twitter stream yesterday when I stumbled on an article by my girl Sandy titled “I Bought A Rental Home With My 401K“. If you’re too lazy to click-through and read the article the gist is Sandy took out a $40,000 401K loan to pay cash on a $38,000 investment property (I didn’t know places that cheap existed…haha). If you want more details you’ll have to read the article.

Contrary to what you might be thinking, I’m not actually here to discuss Sandy’s situation. Instead I thought we could focus on the bigger picture and talk about borrowing from retirement in general. Would you do it? 

I’d be lying if I said the thought of pulling a little bit out of retirement hadn’t crossed my mind. I have a goal to reach $100,000 in savings before Girl Ninja and I buy a house. If I liquidated my Roth IRA (which I can do penalty free on my contributions) we’d be at that $100K threshold.

Maybe I’m stubborn, but when I put that money in to a retirement account, I put it in to a RETIREMENT account. Ya know, for when I retire. This is non-negotiable. Compound interest is a freakin’ miracle. The earlier I invest, the longer I have to let compound interest work to my favor. If I pulled all my money from my Roth IRA, or 401K, I’d lose out on five years of compound interest. The first five years. The most important five years. I ran the numbers, if I took $30,000 out of my Roth IRA today (and then resumed maxing out contributions until I was 65) I would lose $419,000 in earnings.

So yeah, an extra $30,000 would be sweet to have in the ol bank account. But an extra $419,000 in my retirement accounts sounds a heck of a lot better. 

For this Ninja, my retirement accounts are a one-way relationship for the next 40 years. I’ll be putting money in, but wont be taking any out. How about you? Would you borrow from your retirement accounts for a house? A new kitchen? Facebook stock?

Roth IRAwareness

So yesterday was Roth IRA awareness day, where hundreds of personal finance bloggers banded together to spread the good news about Roths. I’m sure you noticed I wrote no such post, in fact, I wrote no post at all yesterday. While I’d like to pretend this is just because I am so rebellious I go against societal norms, the reality is I simply forgot to do it. 

I told my buddy Jeff Rose (Met the dude in real life multiple times. He’s a good guy), I would join the cause and spread awareness about Roth IRA’s faster than chlamydia spreads through a college frat party. It’s a day late, but I want to honor that promise I made. Enjoy some Roth IRAwesomeness…

If you don’t already know, the Roth IRA is a way to get insanely rich with minimal effort. This holds especially true for younger people. The younger you are, the more time your money has to grow. Compound interest for the win!!!! The Roth lets you make contributions with your after tax money (the money you actually get in your paychecks). Your contributions grow tax-free forever and you get to pull out all the profits without having to pay anyone a dime. It’s seriously amazing!

Don’t be confused, Roth IRA’s are not a type of investment, just a way to invest. You can use your Roth to invest in stocks, bonds, REITs , etc. If you’re investing in a 401k, you can even make your Roth investments mirror your company sponsored retirement plan (this is kinda what I do).

There are really only two downsides I see to the Roth IRA. 

  1. It leaves you poorer. If you max your Roth out each year, you are giving up $5,000. Five thousand you could have spent on things like vacations, new gadgets, etc. Good things never come easy. If you want to have millions waiting for you come retirement you have to win the lottery or start investing in your future.
  2. It takes time. With the economy being about as stable as Charlie Sheen’s mental health, my return on investment has been less than stellar. Over the last five years, I’ve put $25,000 in to my Roth and it is currently worth $28,759. That’s a gain of $3,759. It’s not bad, but it’s definitely not where I’d like things to be. If you are super emotional, you may not be able to wait out a crappy market.

Other that those two things, the Roth IRA is pretty much the best thing since sliced bread and if it’s already not part of your retirement portfolio, you should consider adding it. When hundreds of personal finance bloggers band together to tell you about something (when there is no personal gain for doing so) you should probably listen. Just sayin’

You got a Roth? Why or why not? You max it out each year?

Favorite Nail from yesterday: Come at me bro.

 

Double Standard

I have two investment vehicles established for retirement, My Roth IRA and my 401K. I don’t play favorites with these two accounts and if it was within my control, I would contribute to them equally (unfortunately the federal government puts a cap on Roth contributions). If you follow my net worth updates at all, you’ll notice both accounts perform pretty similarly. When my Roth goes up, so does my 401K. When my Roth goes down, my 401K follows suit (although to a lesser degree since the employer match helps mitigate my losses).

Don’t tell Girl Ninja, but I am madly, deeply, and passionately in love with my retirement accounts. If all goes according to plan, they will literally make me a millionaire. Ah yes, one day I’ll be sipping a non-alcoholic strawberry daiquiri on the beaches of the Washington coast with my beautiful wife (can’t travel too far otherwise we won’t stay millionaires very long).

Am I the only person kind of excited about being super old?

Even though I have equal affection for my two retirement accounts, if the you-know-what hits the fan, I’d definitely treat them differently. That my friends is called a double standard.

Girl Ninja and I have saved up some pretty serious cash over the last year and a half, so barring some major medical catastrophe, we shouldn’t have a need to dip in to our emergency fund. One day, however, we will have bought a home and Girl Ninja will likely be a full-time mom. In a few years, we probably won’t have the cash reserves we have now.

So what happens if an emergency comes along that exceeds what we have set aside (currently $10,000) for rainy days? I’ll tell you what. I’d raid my Roth IRA like a college student raids his parent’s fridge.

I like to think of my Roth as a quasi-savings account. You put money in to it (with after tax dollars) and can take those contributions out at any time without penalty. That perk alone makes it the freakin’ Swiss Army knife of the financial sector. It combines a savings account, retirement account, and emergency fund in to one sexy product. Tell me that doesn’t get you all hot-and-bothered?!!? If I pulled my from my 401K, however, we’d be faced with tax obligations AND a ten percent early withdrawal penalty. Definitely not sexy.

Have you ever thought about treating a Roth IRA like a quasi-savings account? If needed, would you pull from a Roth or 401k first? Anyone else want to make sweet, sweet financial love to their Roth IRA?

p.s. don’t pull from your retirement accounts for things like new cars, kitchen renovations, or buying a house. The point of saving for retirement is saving for retirement, not buying shiny things that give you artificial happiness.

Stay the course or mix it up.

Keeping it simple today because we had a crazy night yesterday (we had 20 high school freshmen over for an epic game night). Let’s jump right in to it shall we?

I’ve always believed investing should be kept simple. In fact, I probably keep things too simple. Since I am young, I have chosen to invest 100% of my retirement portfolio in stocks. The stock markets historical long-term performance is too good to deny. As a result, I’ve personally decided to invest in index funds. I invest in small, mid, and large mutual funds as well as an international funds (VTSMX, VGTSX, NAESX for those that care about the ticker symbol). I’ve contributed to the exact same funds since 2007, when I opened my Roth IRA.

This strategy keeps investing– something I’m not particularly interested in– easy. And for me, easy is crucial.

That said, I’ve been reading a ton about people investing in gold, commodities, and the like. Some people who were primarily all stocks, have jump shipped and are looking for alternative places to grow their money, while others are putting more money than ever before in the stock market because they believe it is on sale.

There is no right or wrong way to invest (this isn’t entirely true, but you get what I’m saying). Everyone has an opinion and I want to hear yours. I don’t want the comments to turn in to a pitch on why you think someone should or shouldn’t buy gold (that would be boring!). Instead, I just want to know “Has the recession caused you to change your investing strategy?” Have you become more conservative? More risky? Or are you like myself and haven’t changed a darn thing?

p.s. if you don’t invest your money in something, you are failing at life.