Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
Normally I'd agree, but 5,000 in a Roth @ 24 is worth ~108,600 when he's 64, assuming 8% return. If you assume 9% return it's ~157,000. He would be absolved of paying between 20-30k in capital gains tax, assuming a 20% rate when he retires. That to me is worth a little risk in having a slightly less large emergency fund to get that kind of tax savings. I mean worst case is he just has to withdraw his 5,000. It's not like it's earning any interest sitting in most savings accounts.
8-9% ? Not these days my friend. You assume no losses at all during that period. That is an extremely optimistic stance which I don't think applies in today's world.
8-9% ? Not these days my friend. You assume no losses at all during that period. That is an extremely optimistic stance which I don't think applies in today's world.
Maybe not, but only 3 times in the last 60 years has the S&P 500 yielded below 8% annually over a 25 year period. Even in 1954, which includes the entire great depression crash, the market still returned 8.09% from 1929-1954. You certainly may be right and I don't disagree that returns from the last 25 years will probably not be as good as historical averages...but the historical average return is ~9.5%...and that is if you include the great depression years. The thing is, the 8% already assumes the market returns will be weaker than in the past.
No matter the market return, you are still saving a lot of cap gains tax by using a Roth as a partial emergency fund, with no additional risk since you can withdraw the 5,000 without penalty. Also for all we know the cap gains tax rate could be 40% then and your savings may even be higher. I realize it breaks the established "rule" that most advisors give, but the tax savings is so much greater when you are 24 since the earnings can compound so many times.
Maybe not, but only 3 times in the last 60 years has the S&P 500 yielded below 8% annually over a 25 year period. Even in 1954, which includes the entire great depression crash, the market still returned 8.09% from 1929-1954. You certainly may be right and I don't disagree that returns from the last 25 years will probably not be as good as historical averages...but the historical average return is ~9.5%...and that is if you include the great depression years. The thing is, the 8% already assumes the market returns will be weaker than in the past.
The problem with using past returns to project future returns is that you have to assume nothing has changed.
Over the last 70 years we've eaten up a large chunk of the Earth's resources which will make them more and more expensive in the (near?) future as they get harder and harder to find. That one simple fact should be enough to convince you that past earnings are no guarantee of future profits.
The problem with using past returns to project future returns is that you have to assume nothing has changed.
Sure...but in the 1990s you had this group of perma-bulls and all this academic nonsense about the "new economy" and how things would go up for 20% annually forever, and that history was a bunch of nonsense.
Now you have a different group of perma-bears who say that we should all horde gold coins and that the market has broke even for the last 10 years and the returns will be awful in the future...and that history is nonsense.
I think both viewpoints are unlikely to ever materialize (well one certainly didn't)...and if I am a betting man I would rather bet on history repeating itself than there being some catastrophic paradigm shift that things will change forever. Time will tell, of course.
Correct. Let's say you put 5,000 in January 2009 for the 2009 tax year. In May 2010 you need the money for whatever reason (buy a house, lose a job, etc.). The balance is now 5,500. You are allowed to withdraw 5,000 penalty free (not the 500 in gains). You are not allowed to put the money back for the 2009 tax year but you are allowed to invest another 5,000 for the 2010 tax year.
The reason a Roth can be useful as an extension of the emergency fund is because you can withdraw the money as needed if there is a true emergency. The thing is, in 2011 it is too late to contribute for 2009, so if you end up not needing the money you lose the opportunity to invest 5,000 for tax free earnings, so there is no real penalty to withdrawing it, but there is an effective penalty for not investing in it (opportunity cost) if you end up not needing the money.
But that kinda defeats the purpose of investing to retirement as whatever you take out you cannot put back. For too many people it would be too easy to turn to the Roth for "that new fridge" or "that new car".
drshang..in that case your 5500 - 5000 + 5000 would give you 5500 instead of 10,500 if you had never touched it.
But that kinda defeats the purpose of investing to retirement as whatever you take out you cannot put back. For too many people it would be too easy to turn to the Roth for "that new fridge" or "that new car".
drshang..in that case your 5500 - 5000 + 5000 would give you 5500 instead of 10,500 if you had never touched it.
True, that it does defeat the purpose of retirement savings.
However, if one is just kinda starting out using the Dave Ramsey plan of
1. Emergency Fund
2. Pay Debts
3. Contribute to Retirement
The early Roth covers step 3, but it is considered step 1.
Also, does putting money in Roth tend to have more value than having the cash sit in a savings account in some bank?
True, that it does defeat the purpose of retirement savings.
However, if one is just kinda starting out using the Dave Ramsey plan of
1. Emergency Fund
2. Pay Debts
3. Contribute to Retirement
The early Roth covers step 3, but it is considered step 1.
Also, does putting money in Roth tend to have more value than having the cash sit in a savings account in some bank?
At today's rates of 2% or less..it may just be a wash since when you start out in life you don't have a high salary or lots of taxable income besides your salary where you are looking to defer profits from taxes.
The decision would defintely be different for different folks. This is just my take on it.
2 years ago i started working for a big company. I was offered to join a 401K plan and I did.
2 mos. ago several of us were sent a letter along with a refund ck from our 401k plan. We were told they we didn't quailfity for the plan and we were all sent our money that had been taken out with payroll deductions.
Skip ahead to this week and we all get a letter saying "oops sorry" we made a mistake and you really do quaifity for the plan so please mail us the money back!! Now we had all gotten a 1099 form for this money, this same money, our money that had been taken out of our paycheck.
So how can they say they want to back?? It was our money anyway..suppose we don't mail it back? Many of us already paid bills off with it. What can they do??
Need answers asap [please!!
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
Refund of my 401K
