For the first time ever I’m not loving the Roth IRA

November 15, 2010 · 39 comments

Large McChicken

For three years now I’ve had a crazy love affair with my Roth IRA. It’s consistently been my favorite investment vehicle for serious wealth building. The long term tax benefit and the wonders of compound interest will surely give all PF lovers a warm fuzzy feeling inside. At least, it use to give me that feeling. I’m not so sure that’s the case for me this year.

Thus far, I’ve put a whopping zero dollars in to my Roth IRA. Why the lack of contribution you ask? A few reasons…

I punched debt in the face, literally. I started 2010 off with $16,193 of student loan debt. By June, I had that sucker paid in full. That means, for the first half of 2010, I was putting the majority of my money towards debt and not in to savings. Less money in savings equals less money to contribute to a Roth IRA

I was also preparing for a major life event, getting married! I was responsible for about $5,000 of wedding costs. Saving for the MOST IMPORTANT DAY OF MY LIFE definitely put a damper on having the liquidity to contribute to my Roth IRA. Don’t get me wrong though, it was worth it :)

Punching debt and saving for a wedding  is all fine and dandy, but when it comes to the REAL reason I’ve avoided my Roth IRA like plague, I’ve got to fess up… I’m a big wussy! Seriously, I don’t know what it is, but for the first time ever, I’ve thought NOT investing in my Roth might be a smarter option THAN investing.

I think I’m particularly freaked out because…

1) We only have $20,000 in the bank, $10K of which is earmarked for our E-fund. If I made the maximum 2010 contribution of $5,000, we’d be left with about $5K of discretionary savings. That’s definitely on the low side if you ask me. I’d be much more comfortable if we had about $30K total in the bank.

2) Lackluster performance over the last three years. I started contributing to my Roth IRA in 2007, immediately after graduating college. While I know compound interest favors early investing, I’m a little upset by my gains. I know, I know, three years isn’t enough time to let my Roth IRA work it’s magic, but seeing a negative ROI month after month starts to wear on me. Bah humbug.

3) The stock market is up like 16% since July. I don’t like the idea of buying when the markets are at one of their highest points in the last two years. I’m just not convinced we’ve seen all the potential drama. Many say a second recession is inevitable. If I had the liquidity to buy in 8 months ago (when the markets were going down), life would be sweet. Buffet said it best “Buy when everyone else is selling Or in other words, DON’T buy when everyone else is buying…like right now!

I have until April 2011 to decide what I should do with this $5,000. I seriously don’t know what I’m going to do and would love your input.

Anyone else that hasn’t yet made your 2010 Roth contributions a little unsure of what to do? I think what I really need is some encouragement from those that advocate FOR investing. I know any short term loss will be followed by a long term gain, I’m just a little freaked out right now. How do you stick to your goals when you get a little uneasy?


1 StackingCash

Trust your gut. Only you should decide on what you should do with your money. Don’t be swayed so easily when all financial industries tell you what you should do with your money. Odds are that they are NOT looking out for your best interests. It has taken me big losses to learn that lesson and I’m STILL questioning myself because I’m constantly bombarded with financial ads. I find it funny how #2 and #3 are contradictions. That is why I’m out of the markets, I just don’t trust Wall Street.

On the flip side, maybe you should just stick with dollar cost averaging. It looks great on paper.

Maybe if I had invested with Vanguard my viewpoints might be different. I hear that they are a great company.

It also sounds like your liking my strategy of just plain old stacking cash in the bank. It is a powerful feeling.

Good luck!

2 Sanchez

You don’t have to put it in the equity market. Since Roth is capped each year, it is good to get it in regardless of what you do with it. It’s the only way to seal up all the future tax free growth for the next 30-40 years, even if right now the market may be too frothy for your taste. Even if you keep it in something that gains you nothing for the next 5 years or so, you’ve still got 25-35 years of compounding growth. If you don’t put that 5k in this year, you don’t get to put that 5k in ever because of the yearly cap.

You could put it in an extremely conservative bond fund or ETF (one without a load or redemption fee) and watch it to make sure you can move it into something else if interest rates start going up. Another option would be a money market fund. I would definitely check out Vanguard for this. Their fees are low and they have such a good variety of fund and ETF options in one place. Then you can be safe and still have the option for long term gains. You could go a little more risky and open a IRA account, though after year two I think you need to have 10k in to not pay fees, so you’d have to contribute next year too.

It may take a hit on cash in hand, but if something really came up, you can put it on credit. Paying CC interest for 6 months to pay off 5k ($375ish at 15% interest) is way better than losing out on 30-40 years of tax free growth.

Here’s a link to Vanguard Funds by Asset Class –

Here’s a link to ETF’s of their funds by asset class –

3 gyps808

I dollar cost average for both my husband and I; $500 every month into each Roth IRA, taken out and invested automatically into a target mutual fund. It’s $1k I have to factor into our monthly budget, which including my automatic deductions into savings as well as the cost of the whole life insurance policy (don’t even get me started on how we got suckered into that one, I know it’s a piece of junk but we’re in it so we’ll deal) is about what I make in a month after taxes. Sometimes I worry that we’re not actually saving enough in cash (even though we have a fully funded e fund) but I tend to try to avoid thinking about the what-ifs. I mean, in hindsight I would have bought netflix when it first came out, and would have bought apple when it tanked in 2008. I’d be pretty well set since those two options would have tripled my money…captain hindsight is a pain in the butt. Of course, also in hindsight I wouldn’t have bought amd, cause that’s down 20+%. Win some, lose some.

4 Stephanie

Same here. I’ve apparently also made back almost all of my losses from 2008 with that strategy too.

5 Stu

I’m in a similar boat…I have 3k of the 5k already invested…but have been waiting for the Roth to drop a bit before sending the final 2k from my savings account (E-Fund and everything else is good, just have been lazy on the last 2k contribution).

We still have almost half a year (until April) for the market to tank! Here’s to hoping for another hard recession soley so I can get a better return on my Roth!!! :) (slight sarcasm…kinda)

6 Michelle

Don’t you mean $10,000 contribution limit? Or are all the retirement savings going to be yours & GirlNinja’s gotta rely on YOUR accounts? You appear to be pretty disciplined, but the temptation to hold onto that money is overriding your plan…and when you start moving off-plan, bad things happen!

Two things – first, the market is still on sale compared to where it was the year you got out of college. I hear ya that the last two years have been depressing, but the numbers of shares I hold in my 401k for the same total $ value as in January 2009? HUGE difference. Secondly, you forget that you are getting favorable tax treatment of every dollar you invest now. So that Roth’s real ROI is eventually going to include the automagic return at 30% of NO TAX to be paid on it in 2030′s dollars.

Assuming you’re on track to make $60K and GN has earned income of $20K, your marginal tax rate is roughly 9.5%. But if you & girlNinja both had a full years’ income under your belts & on your tax returns at 100K, your marginal tax rate jumps to 11.5% for 2011 – assuming the tax cuts aren’t repealed. So investing it for 2010 makes sense; plus with a Roth, when you do get around to buying your home, you can change your mind & withdraw up to your contributions with no penalty to use for your downpayment.

If you really were queasy about the future of the market, you’d be stopping your TSP. Stop being silly.

7 Michelle

to soften the above harshness – part of my rationale? Your income is going nowhere but up…by the time GN is ready to come home with the babyninja’s, your rockstar secret agent qualities are going to be earning you the big bucks. So now might be the lowest taxes of your life…(other than when you get a passle of lil’ deductions running about). I make 100K, file Head of Household with 1 dependent and my marginal tax rate is 16%…and many of the deductions the not-evil-not-rich-people get, are phased out at my income level. Because, ya know, I’m the evil rich single mom who shouldn’t get to write off any of my $10K childcare costs.

8 Ninja

You’re right. I am being silly. Gotta get my priorities back in line!

9 Jake Stichler

Again, holy crap, there’s no compound interest in a retirement plan. Someone said something about it on reddit when my “ditching my 401k” article got hit up on there, too. If you can lose money, it’s not compound interest.

10 Jake Stichler

Let me reiterate as well as explain (posted too soon, sheesh).

Not only is there no compound interest, there’s no interest at all. It’s not a savings account, it’s not a CD. It’s a gamble, through and through. Accruing interest involves having a principal, and an interest rate. You have neither. What you have in a traditional retirement plan is contributions and a wish. Wish in one hand, shit in the other, see which one fills up first.

Just logged in to my 401k account. No interest. They tell me my account balance, my *contributions,* my *employer contributions,* and my personal *rate of return* for the last quarter (11.24% BTW). And then they tell me to give them more money.

11 Ninja

Maybe it’s called Compound disinterest then?

12 Moneycone

Sorry Ninja, I’m going to respectfully disagree with you on this one! :)

Money in Roth is still liquid, you can take it out the principle without penalties. No one can truly time the market – that shouldn’t be the driving thought behind Roth contributions. Roth should be made as monthly contributions rather than a lump sum at the end of the year – will be a lot easier on you. Even if you cannot max out your contribution, you should contribute what your circumstances allow.

13 Ninja

I need the disagreement and someone to slap me across the face and say DO IT! A little tough love is what I need :)

14 Crystal @ BFS


The way I see it, we are young, the compound interest will kick butt in 30 years, and you can always take the $5000 you contributed out, but you can’t un-skip this year of contributions! I’d also suggest putting your Roth IRA contributions into a better vehicle if you are currently getting negative returns. Ours is in the Fidelity 2040 fund and is up 8% overall from when we started in 2007 (it was down 36% at the worst point but has bounced all the way back and then some since then…of course we did put in big chunks of money after crashes…).

15 Everyday Tips

First off, I would dollar cost average that contribution so you don’t have to worry about timing the market.

Second, I would max my work 401k before I invested in a Roth, but that is just me.

Third, you gotta do what you are comfortable with. If you don’t like the amount of money you have readily available, then don’t invest it. Whereas you can withdraw what you invested in a Roth penalty free, there may not be much to withdraw if the market tanks. So if you think you need it more as part of your emergency fund, then skip it.

16 ss4bc

So let me get this straight: because stocks/mutual funds/ect are on huge major sale right now you’re not going to buy because it is too much of a bargain????

Ninja, you are young, $15k in the bank is more than enough for discretionary and EFund. Don’t think so short sighted. You know the saving young is best for long term growth and buy low/sell high is the aim. So why are you so afraid to buy low?

17 ss4bc

To clarify, now is still low compared to the highs of the past.

18 Kevin @

Simple answer (that will not require the popular clarification followup): Don’t ask yourself if the market seems high based on the last two years; ask yourself if you expect those investments to grow a lot between now and the next 40-50 years.

If you are investing in good, solid companies you believe in, it won’t matter much if you bought in at 15.68 or 14.97 when you have 40 years of dividends and the stock price is about 200 in 2050

19 Ryan@theFinancialStudent


20 StackingCash

That’s awesome! Where do I sign up!

21 Donnie

Ninja, keep in mind that in 2011 the TSP will be offering a Roth option. You could have more Roth space than you know what to do with then.

22 Ninja

OMG. Forgot about this! I have to look into it again right now!

23 Little Miss Moneybags

I’d do it. You can always withdraw the money you’ve contributed to a Roth in the future, but you can’t ever go back and re-contribute once the time is passed. If your retirement accounts aren’t doing so well, maybe you should take another look at the funds and re-allocate to some less risky investments. But I still think you should contribute.

Full disclosure: my husband and I have both maxed out our Roths for 2010. And we’ll do it again in 2011. And we’re making money! Small gains, but gains nonetheless. It’s worth it.

24 Larry

Thoughts in random order:

1. Stocks are for the long term. Historically speaking, no other investment has yielded such a high rate of return over the long haul, or is more likely to outpace inflation. The long haul means 25+ years, not 3.
2. Stocks are volatile. Expect them to go up and down. But over the long term . . . (continue with point 1).
2. If you’re with Vanguard, stay with Vanguard. Passive index fund investing offers the lowest costs, which means you keep more of your gains.
3. If you dollar-cost averaging, you’re buying low at some times and high at others. But no one knows how high or low the market is now. It’s all relative.
4. Diversify, diversify, diversify. You have said you own no bonds. You’ll take less of a hit with 10% of your assets in a bond fund like Vanguard’s Total Bond. But put bonds in a tax-deferred account rather than a Roth. On the other hand, at your age it’s fine being 100% in equities, because you’ve got plenty of time to recover from any losses.
5. Don’t look at your Roth in isolation. If you also have a tax-deferred account (traditional IRA, 401k, 403b, or equivalent) track your total assets. Including Wife’s.
6. $20K in cash is plenty, unless you’re saving for a short-term goal.
7. Ignore the financial gurus.

25 Ninja

I’m a fan of #7! Haha. Thanks Larry

26 Evan

It is called PERSONAL finance for a reason. If you aren’t comfortable with your liquidity then that should be goal #1, but you have to know where the end of that goal is. Is it 30K in the bank? 50K? Maybe you are close and want to split contributions – dollar into your roth dollar into liquid savings?

27 Bonnie

I personally don’t think that anyone can have enough in their emergency funds right now. Doesn’t anyone else have friends or family who have been out of work for months or years? 20K doesn’t last forever.

28 Desi Guy

I can relate to that feeling. I have been putting money into savings accounts religiously without completely funding my 401k or Roth accounts, but i have different reasons for doing that.
Since i am not sure if i will be here or back in my home country in 10 years from now, my investment/saving situation is very different, but i don’t blame you for wanting to have a good cushion in your savings account while maybe putting 3000 each in Roth instead of the full 5000.

29 Crystal @ BFS

We auto-contribute $300 a month, threw in $1000 8 months ago, and just contributed our last $400 extra for the year yesterday. I don’t want to miss out on the long-term compound interest. Plus, our Roth IRA is up 8% overall…

Now, we were going to open a 2nd Roth IRA for 2010, but we also paid off our last car loan instead and are now putting the extra towards are emergency fund to get it back up to $10,000 (we just brought it up to about $7700 yesterday). We may open a 2nd Roth IRA for 2010 in February or March 2011 if I have a job I’m happy with by then…liquid assets for job instability trumps 2nd Roth IRA…

30 Ninja

Automated life seems like the way to go. It helps limit the mental hesitation!

31 Jenna

I haven’t contributed much this year either, just been super busy. I’m hoping to add my $5K right at (or shortly after) the New Year.

32 Jeff

Long time reader first time comment. I feel the same as you about the last of my Roth savings so I just stuffed them into a MMA in my Roth brokerage account. It’s sitting there earning 1% interest right now but I’ve technically capped my Roth contributions for this year. I can use that money to dive in whenever I want.

33 Jeff

P.S You’d still have 15K in total savings which really is quite a bit for someone who can cut expenses like crazy (IE no kids). Once you miss your IRA contributions, they’re gone forever. I was in the military for 6 years saving huge amounts of money and I really really REALLY wish someone explained to me what a Roth IRA was. That being said, I believe you can still contribute for 2010 until April 2011.

34 Sara

Not to dissuade you, but I had this issue last year, and I *didn’t* put my money in, which I’m glad about now because my account seriously lost 60%+ of it’s worth in the mean time. It’s finally going back up again, but I didn’t contribute anything for 2009 (I still auto-contributed to my other retirement accounts), which isn’t ideal in any world, but part of me is really not a fan of putting money in, just to watch it disappear. So clearly the situation was a bit different, but the nervousness about it was the same. Annoying!

35 First Gen American

I didn’t think you had to invest in stocks to be in a Roth. Can’t you do a bond type mutual fund instead? That might be safer.

36 Chris

Love your blog even if I am way above your targeted readership age.I wish financial info would have been as easy and entertaining to get 20 years ago than it is nowadays.
I’d like to nudge your thinking about the Roth a little bit.It’s not about immediate return or loss but long term gain and tax savings as many pointed out before. Sure we all regret the constant market losses, heck for a while it felt it would have been better to have spend my 401K contributions in Las Vegas than than seeing my account at the same or lower level for the better part of the year but it finally started to turn around.
If you are worried about an immediate crash in your savings and about market fluctuations, why don’t you establish your monthly contribution to the max $416/m from here on in to the future and plan to contribute the difference from this years $5K in monthly installments til April ? You would still be able to take advantage of your max 2010 $5K by cost/dollar averaging without hemoraging your savings, you might even cash flow part of it.
BTW lots of people also see their Roth as a medium term savings vehicle, even stashing their e-fund in there because you can take your contributions out without tax and penalties( don’t know if 5 year limit still applies), i.e. for a down payment on a house. So what are waiting for? And what about ninja girl’s Roth? After all the combined resources, retirement planing should be part of it too (wouldn’t want to lose on her 2010 contributions?)

37 MyMoneyMess

I’m going to buck the trend a bit here. I’m not going to say do it or don’t do it. You’ve recently discovered the need to rework your insurance coverages. Maybe you feel uncomfortable with the size of your emergency fund, maybe you don’t.

The truth is it’s your money and neither the talking heads on TV, the financial gurus who make their livings selling you their “expertise”, nor anyone posting comments here (especially me) can make the decision for you. We feed you whatever crap sounds good to us or whatever. It’s really easy to do because we don’t have to live with the decision. You do.

Your life changed dramatically by getting married this year. You need to take a step back and look over your entire financial picture from that perspective and discuss it with your wife. Then decide what’s best for you as a couple. Remember the biggest adjustment from being single to being married is that your actions or inaction affect the most important person in your life. It’s an entirely different thought process.

38 Mike D.

Ok I haven’t read all of the comments so sorry if I’m repeating someone else. I would invest the money because after April you lose the opportunity. You can never put in 5k for the 2010 tax year again. If you don’t want it in stocks put it in a different fund, but invest. You’ll never know where the market will go for the rest of the year, or years from now for that matter. It may be up 16% from July, but it’s done pretty poorly for the past few days. Maybe it will drop more, or maybe it will shoot back up by the end of the year, who knows.

39 Executioner

A Roth IRA is a type of ACCOUNT, not a choice of a specific investment.

You can contribute the $5K per person to your Roth IRA(s) and leave it sitting in cash if you want to. You can always choose to move from cash to another security at a later time. But you can’t contribute your 2010 amount to the ACCOUNT past April 2011.

And as other commenters have mentioned, you can withdraw contributions to a Roth IRA at any time without penalty.

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