Should I max out my Roth IRA contributions before investing in another vehicle?
I started a Roth IRA about a year ago. I'm really ambitious to save as much as I can over the next 15 years. Besides the Roth IRA, I want to invest another $10K into some other long-term vehicle. What would you recommend? I really want to be smart about this. Should I max out my Roth contributions first before going with a new investment vehicle?
Absolutely. Max your Roth IRA so you can take advantage of the tax-free growth and qualified returns. You can invest the additional $10k in a more conservative taxable account with a low-cost ETF portfolio. If you want it to be long-term, that is great, and it can also be for shorter-term needs with no penalty for early withdrawals. You can setup both account types with advisor oversight at Betterment.
It's difficult to say with 100% certainty because I don't know more of the facts about your situation - but in general, if you are able to contribute to a Roth IRA - it's not a bad idea to do so. You should think of the "investment vehicle" different from the "account type", because you can pretty much buy any vehcile in whichever account type (Roth IRA, non-IRA, pre-tax IRA, etc.) that you choose. I would also encourage you to focus on saving at least 10% of your gross income annually - if not 15 to 20%. In other words, focus on the percentages as a long term goal measure rather than the dollar amount. I would consult with a professional for more specifics!
Max out the Roth IRA first. The tax-free growth and withdrawals are tough to beat. Chances are, over the next 15 years you might end up earning so much you won't be eligible for funding the Roth so, for now, take advantage of it and maximize it. As far as the next step, if your employer offers a 401k, I'd recommend deferring to that. If you are under age 50, you can defer up to $18,000 of earned income each year. For 50 and above, you can defer an additiona $6,000. If it's a pretax deferral this will help reduce taxes each year you fund it.
Beyond that, start a brokerage account, add savings along the way and build a diversified portfolio to help you achieve your long-term goals.
Love to talk with other ambitious saver- Keep up the good work. I love a ROTH IRA- while you don't get a tax break now the money can grow tax free and come out tax free. Maxing it out sounds like a great starting point for your savings plan. The only drawbac is the $5500 contribution limit per year.
For the other $10k it will depend on your financial goals. You said long term you may want to put some or all of that in a 401(K) if you have one at work. Or you may want to just sock this money away in some type of diversified portfolio that isn't necessarily in a retirement account.
If you are lucky enough to have a ROTH 401k option at work read this post:
Live for Today, Plan For Tomorrow.
DAVID RAE, CFP®, AIF® is a Los Angeles-based financial planner with DRM Wealth Management, a regular contributor to Advocate Magazine, Huffington Post, Investopedia not to mention numerous TV appearances. He helps smart people across the USA get on track for their financial goals. For more information visit his website at www.davidraefp.com or the Financial Planner LA blog.
It depends on a variety of factors: your age, your various objectives, your tax situations, debt profile, etc etc.
However, I will say this: if you can max out your Roth contributions for 15 years and also save $10k after tax in a taxable investment account, it should be a great step for your retirement plan. While investing in a taxable account won't shield you from owing tax on capital gains and dividends, these factors are likely to be de minimus by many standards until your account reaches a large size. Additionally, you'll have access to these funds in the event of a short term need for capital (like a home purchase or some unexpected emergency).
Of course, this is for general informational purposes only. If you'd like to talk specifics, feel free to shoot me a call or message.
Adam Harding | Investments & Planning