Small dilemma (IRA related)

[cougs4bcs]

So here's how my finances are at the moment:
Age: 22 and graduated from college 1 year ago
Net Income: ~$3100/mo. 2100 base and ~900/mo in bonus/commish (lowballing my monthly bonus amounts)
Expenses: ~$1200/mo.
Checking: ~$1000
Cash Savings: $9000
401k: $300 (just opened recently. Contributing 7% of income and employer matches 50% of contributions up to 3% of salary). Just set up an aggressive growth fund with an expense ratio of 1.1. There weren't many other options that I was interested in with a smaller ratio.

What I am asking is whether I should fully contribute $5000 from my savings to open up a Roth for 2012 contributions? My emergency fund consists of $8000 of my savings account. Would it make sense to contribute now instead of later? While I don't like the idea of depleting my emergency fund, I want to open and fund a Roth ASAP. Another thought I had was that I could contribute 3000 now and then contribute the last 2000 before mid April?

Or should I just wait until February or so to make the full $5000 contribution?

If I forgot to give any more information, let me know! Also I am in a position to be very aggressive with my retirement accounts if that helps at all.

[creditcardfree]

As someone who just turned forty, I think it is awesome you are looking to invest as early as you are. I think I would look at the contribution you want to make for 2012 as a percentage of gross income. Are you wanting to start out contributing 10%, or more like 15%? Clearly you have the cash to do either.

There is no right or wrong way. You could invest the $3000 now, and add $500 each month from your current pay for four months to get the remaining $2K. To get to $5000 each year you would need to invest $416.67 each month.

[thesimplemoneyblog]

In my opinion, there aren't many reasons why you shouldn't contribute the $5k now and then work on contributing the $5,500 for 2013. If you want to wait, though, that doesn't hurt either since you have until April 2013 to make a 2012 IRA contribution.

Given that contributions to a Roth IRA can be withdrawn penalty and income tax free at anytime, you could technically use these funds in a worst cast scenario as you continue to build up your regular emergency fund. The earnings in the Roth, however, would be subject to income taxes and penalties.

The good thing about a Roth IRA is that if you withdraw funds from the account, contributions are withdrawn first and then earnings are withdrawn second.

[disneysteve]

Welcome.

I would cut the 401k contribution down to just enough to get the full company match. The investment choices sound like they aren't very good. A 1.1% expense ratio is way too high. You'll do much better with your Roth investments. For example, an S&P 500 index fund at Vanguard will have an ER of just 0.17%.

I would not deplete your EF to fund your Roth. While I certainly admire your intent to fully fund it for 2012, that shouldn't be done at the expense of being properly prepared for possible short term needs. If you need 8K for your EF, open your Roth with 1K now and add as much as you are able to between now and April 15. Then start working on your 2013 contribution at that point.

You've got income of $3,100 and expenses of only $1,200 so you are saving $1,900/month. You'll have the Roth funded in plenty of time without touching your EF.

[cougs4bcs]

In my opinion, there aren't many reasons why you shouldn't contribute the $5k now and then work on contributing the $5,500 for 2013. If you want to wait, though, that doesn't hurt either since you have until April 2013 to make a 2012 IRA contribution.

Given that contributions to a Roth IRA can be withdrawn penalty and income tax free at anytime, you could technically use these funds in a worst cast scenario as you continue to build up your regular emergency fund. The earnings in the Roth, however, would be subject to income taxes and penalties.

The good thing about a Roth IRA is that if you withdraw funds from the account, contributions are withdrawn first and then earnings are withdrawn second.

The thing is that I absolutely do not want to ever have to do an early withdrawal from my contributions. And that being said, the only thing keeping me from making my contribution is that it would deplete my savings account to $4k from $9k. While I would have no issues getting my emergency fund back to what it is now, I do plan on making the max contribution within the next couple months anyways if not sooner.

[sblatner]

The thing is that I absolutely do not want to ever have to do an early withdrawal from my contributions. And that being said, the only thing keeping me from making my contribution is that it would deplete my savings account to $4k from $9k. While I would have no issues getting my emergency fund back to what it is now, I do plan on making the max contribution within the next couple months anyways if not sooner.

I understand that you don't want to early withdrawal...you would only do that if you had a true emergency.

If I was in your situation, I would fully fund the $5k for 2012 now, auto invest $458.33 ($5500/12) starting in January for 2013 and just get it all automated. Then get my emergency fund back up to $10,000 or so with what is left over.

Good for you. I wish I was so diligent in my 20s.

[MonkeyMama]

Just do it in April. That is what I would do. At that point, I would put in $5k no matter what the cash situation. Of course you don't want to pull that money out in an emergency, but the flip side is losing the opportunity to put away $5k.

{For many years a chunk of our ROTHs doubled as an emergency fund, so I could stomach parting with the cash, but we never touched it. Waiting until April buys you time to make a better decision. If you were jobless or faced a big emergency in the interim, obviously you would reconsider. On the flip side, when it comes to retirement in several decades, it won't have mattered if you waited a few months to make the contribution}.

I agree with putting less into the 401k, and focusing on maxing out the ROTHs.

To be clear - if you just move the cash to your ROTH in order to not give up the annual contribution limit, but intending it as a emergency backup, keep it in cash. It can be invested later when you feel more comfortable with your non-ROTH cash balance.