Open brokerage account or put all savings into Roth IRA?

[tcatsninfan]

Hello,

I'm 30 years old, currently teaching overseas and don't have access to any kind of company-sponsored pensions/retirement plans/401(k)s. However, I've been putting 10% of my income into a Roth IRA for a couple of years now (one of Vanguard's target date retirement funds).

I want to save more money and earn more interest, but I'm also worried that dumping all my savings into the Roth IRA might leave me at a disadvantage in middle age. Having a million dollars in the Roth IRA is all well and good unless something happens and I need the money when I'm 40 or 45.

So my question is this: should I dump another 10% of my income into the Roth IRA, or should I instead open a traditional brokerage account and invest in one of Vanguard's mutual funds? I realize the taxes would be higher and such, but I would have access to that money before I turn 60...

For what it's worth, I don't have any credit card debt or student loans, so it isn't a matter of choosing to pay those things off before saving for retirement.

[disneysteve]

Welcome.

I think you need to separate your savings based on what it is you are saving for. For retirement, A Roth IRA is an excellent choice. Ideally, you want to be saving at least 15% of your gross income.

You also need to be saving outside of your retirement plan for other needs. You should maintain a 6-month emergency fund and be saving for shorter-term things like vacations, home repairs, car repairs, holiday gifts, etc. Whether or not that money should be invested in equities really depends on your timeline. Your EF shouldn't be. That needs to be safe and liquid. The other stuff really depends.

[bjl584]

What is the actual dollar amount that you are putting into your Roth?

The max is $5500 a year, so anything saved above and beyond that will have to go elsewhere.

[disneysteve]

should I instead open a traditional brokerage account and invest in one of Vanguard's mutual funds?

I also wanted to comment on this. If you want to invest with Vanguard, open a Vanguard account. Don't open some random brokerage account to get access to Vanguard funds. Go directly to the source. You'll pay less in fees that way.

[richard johnson]

Welcome.

I think you need to separate your savings based on what it is you are saving for. For retirement, A Roth IRA is an excellent choice. Ideally, you want to be saving at least 15% of your gross income.

You also need to be saving outside of your retirement plan for other needs. You should maintain a 6-month emergency fund and be saving for shorter-term things like vacations, home repairs, car repairs, holiday gifts, etc. Whether or not that money should be invested in equities really depends on your timeline. Your EF shouldn't be. That needs to be safe and liquid. The other stuff really depends.

I agree with him. For retirement Roth IRA is best and for other things build an emergency fund.

[autoxer]

I want to save more money and earn more interest, but I'm also worried that dumping all my savings into the Roth IRA might leave me at a disadvantage in middle age. Having a million dollars in the Roth IRA is all well and good unless something happens and I need the money when I'm 40 or 45.

Do you pay US federal income tax? Do you plan to return to the US?

The advantage of a ROTH IRA over a brokerage account is that it grows tax free. With a brokerage account you will have to pay tax on the dividends yearly and tax on the capital gains whenever you sell an asset. If you expect to have a minimal tax burden with a brokerage account, then it could be a better place to keep assets, then in a ROTH ira. If you expect to have a higher tax burden in the future, then the ROTH is a better choice now.

One other note about the ROTH account, you can withdraw the 'contributions' without penalty as long as the contribution has aged 5 years. Read up on the ROTH rules and you may be more comfortable using it.

[tcatsninfan]

Right now I'm putting $2400 a year into my Roth IRA, which is 10% of my net income. My income isn't taxed in the US because I meet the requirements for the Foreign Earned Income Exclusion. I know this will change if/when I live in the US again, but honestly I'm not sure when or if that'll happen. After living overseas, I realize how much money it costs just to live in the US. There are things I miss, but I'm not trying to move back anytime soon.

I've been taking vacations every year, but this money comes from savings rather than from credit cards. I use my credit cards to buy flights and such so that I can get the reward points, then I pay it off before any interest is accrued. So, I guess technically you could say that I have a short term savings account worth a few thousand dollars.

I realize the amount I'm putting into my Roth IRA isn't going to get me to a million dollars by retirement. At the same time, though, I want to enjoy myself now where I can. I spend money on experiences, not things. I could've skipped the trip to Cambodia last year and put that money into my Roth, but it wouldn't have been great for my mental health. I enjoy taking at least one big trip every year.

Also, I've had family members who have died young or become permanently disabled at a young age. My dad had a stroke at 52 and is now wheelchair bound. So I feel good about taking these vacations now and saving a little less for retirement.

Nonetheless, I think putting 20% of my income into the Roth would be a good idea from what you guys are saying. And I didn't realize you could withdraw your contributions after 5 years...that's extremely helpful. Let's run through a hypothetical situation. Let's say I've contributed $1000 to my Roth and after 5 years there's $1200 in my account ($1000 contribution and $200 interest). If I withdraw that $1000, what happens to the $200? Is it reinvested and maintained in the account? I apologize if that's a confusing/weird question.

I'll also continue building up my emergency fund. Right now it varies depending on the time of year and when I took my last vacation, but I know I should build it up more to have 6 months of income available.

Your replies have been helpful. Thank you everyone ^^

[Petunia 100]

Right now I'm putting $2400 a year into my Roth IRA, which is 10% of my net income. My income isn't taxed in the US because I meet the requirements for the Foreign Earned Income Exclusion. I know this will change if/when I live in the US again, but honestly I'm not sure when or if that'll happen. After living overseas, I realize how much money it costs just to live in the US. There are things I miss, but I'm not trying to move back anytime soon.

I've been taking vacations every year, but this money comes from savings rather than from credit cards. I use my credit cards to buy flights and such so that I can get the reward points, then I pay it off before any interest is accrued. So, I guess technically you could say that I have a short term savings account worth a few thousand dollars.

I realize the amount I'm putting into my Roth IRA isn't going to get me to a million dollars by retirement. At the same time, though, I want to enjoy myself now where I can. I spend money on experiences, not things. I could've skipped the trip to Cambodia last year and put that money into my Roth, but it wouldn't have been great for my mental health. I enjoy taking at least one big trip every year.

Also, I've had family members who have died young or become permanently disabled at a young age. My dad had a stroke at 52 and is now wheelchair bound. So I feel good about taking these vacations now and saving a little less for retirement.

Nonetheless, I think putting 20% of my income into the Roth would be a good idea from what you guys are saying. And I didn't realize you could withdraw your contributions after 5 years...that's extremely helpful. Let's run through a hypothetical situation. Let's say I've contributed $1000 to my Roth and after 5 years there's $1200 in my account ($1000 contribution and $200 interest). If I withdraw that $1000, what happens to the $200? Is it reinvested and maintained in the account? I apologize if that's a confusing/weird question.

I'll also continue building up my emergency fund. Right now it varies depending on the time of year and when I took my last vacation, but I know I should build it up more to have 6 months of income available.

Your replies have been helpful. Thank you everyone ^^

Actually, you can withdraw your contributions at any time. The 5 year rule applies to conversions, not contributions. Also, to withdraw earnings, you must be at least 59.5 AND your Roth is at least 5 years old.

If you had a $1200 Roth and withdrew 1k, the remaining $200 would sit there in the account, invested in whatever way you had specified. Be aware that the custodian may have minimum balance rules and not allow your account to remain open. But that is not tax law, that is up to the custodian.

[Thrif-t]

Yep I was going to say what Petunia did on the withdraws of your contributions at any time in a Roth. This is what we use for our long term savings account. We have it invested in cd's inside the Roth so it's not risky. We also use this strategy because we have one in college and two more on the way and our retirement money isn't counted against us as heavily as if it was in a plain savings account come financial aid time.

As long as I can take out what I put in (and I can) it's a win win for me. And if interest rates ever move back up, it will be nice not to have to pay taxes on my interest income

[tcatsninfan]

Awesome information! Thanks everyone. Now, related to this, I've been investing my money in one of Vanguard's so called lifecycle funds. It's VTIVX--Vanguard Target Date Retirement 2045 Fund.

I've been thinking about diversifying things a little bit and investing in some other mutual funds, but I dunno. Is it better to diversify, or am I already diversifying things since VTIVX is made up of hundreds of individual stocks?

[disneysteve]

I've been investing my money in one of Vanguard's so called lifecycle funds. It's VTIVX--Vanguard Target Date Retirement 2045 Fund.

I've been thinking about diversifying things a little bit and investing in some other mutual funds, but I dunno. Is it better to diversify, or am I already diversifying things since VTIVX is made up of hundreds of individual stocks?

VTIVX is comprised of 4 mutual funds - total stock index, total international stock index, total bond index, total international bond index. So you've already got pretty broad diversification. That's the point of the target date funds - one fund to cover all bases.

If you want a different allocation than the target fund provides, such as more stock or more bond or more international, then you could choose to supplement with another fund. You just need to decide what you're aiming to achieve.