protecting money in roth ira

[Goldy1]

I am a stay at home mom of 2. our main savings for retirement are my husbands 401k. our income is not high, it is around 50kish a year but we live fine with our emergency fund in order. we are all healthy but you never know what could happen.

my question is what to do with extra money we don't use to live besides the bank. husband I am thinking ahead to college for 2 kids we have. Our kids are only one years old and almost seven.
I know we cant afford to pay all or much of it at these increasing rates. I like that you can get money out of a roth if needed(contribution) in case we need it in the event of job loss etc.
I thought adding money to a roth would be a good way to save for college for my kids or to help them get financial aid if needed since savings would be there instead of bank. I read money in roth iras does not count toward your assets on a fafsa.


we already pay extra on mortgage monthly.

we have about 13K each in roths. it is currently invested in target retirement accounts through fidelity conservatively. (fidelity retirement date target 2015 and 2020. we would like to add more but not take any risk of losing the contribution. For instance target retirement date 2015 is over half stocks!!!! would it be silly to add money to a roth ira and buy a cd?

I called fidelity and briefly talked to a rep about investment options that are not risky. the rep told me about bond funds but I knew from previous research that bond funds can loose money or cds in my roth.
basically I want to put money in a roth and not take ANY risk, but then I know if I keep money in a bank it is fdic insured so
I may not do this.
I was told money in a cd in a roth would be fdic insured. I guess I have about 4k or so a year to save and not sure if roth is where to put it or not!!! main retirement risk is hubbies 401k so am I making a mistake if I use a roth for savings. husband likes his job and has been there over ten years. however if he looses his job ever it will be very difficult to get a new one because his job is very niched. so his 401k is enough risk for it.

[MonkeyMama]

Yes, I've had a CD in my ROTH. Or other cash accounts in my ROTH. Is fine.

In general, I wouldn't keep a dime in taxable accounts unless my ROTHs were maxed out first. The reason is because they are easy to access, and the long-term tax benefits are incredible if you don't end up using the money.

We viewed ROTH as college savings and other savings when we were able to put huge amounts away to retirement. I never would have tied up all that money just for retirement. But was willing to do it if we could earmark some of it for college.

All of that said, with the 1-year-old at least I would seriously consider taking some more risk. You have time on your side. The general rule is to leave in cash what you need in 5-10 years. So with the 7-year-old it is what it is. I know most people will push you to invest that money too, but I would not. With the one-year-old, I would consider taking some more risk.

[autoxer]

If you put $4k into a CD in a ROTH, earning 1.25%, then it would earn $50 over a year. Being in the 15% tax bracket, this would reduce your taxes by $7.50 vs. just using a CD at the bank in a taxable account. If you contribute $4000 every year for 10 years, then you'll have about $40,000 in contributions and ~$2,850 in earnings. So over a decade, this could save you roughly $430 in taxes. If you then start withdrawing your contributions, then the withdrawals will show as income in subsuquent years FAFSA applications.

If I was in the 15% tax bracket and expected to stay in that bracket, then I would be more interested in long term capital gains and qualified dividends, because then you have the best of both worlds, low tax rate (0%) and accessibility.

I often see people praising the fact that you can get the contributions out without penalty, but I don't see that as a selling point. A ROTH has the most potential to save taxes over long periods and with more aggressive investments, so in my long term plan, the ROTH will be the last account I tap into. I'm not suggesting you invest more aggressively than you are comfortable with, just that a ROTH is more valuable in that situation.

Regarding saving for college, have you considered a 529 account?

[Goldy1]

I thought after 59 roth withdrawls were not taxable. We already paid taxes on roth contributions

[MonkeyMama]

I often see people praising the fact that you can get the contributions out without penalty, but I don't see that as a selling point. A ROTH has the most potential to save taxes over long periods and with more aggressive investments, so in my long term plan, the ROTH will be the last account I tap into. I'm not suggesting you invest more aggressively than you are comfortable with, just that a ROTH is more valuable in that situation.

Regarding saving for college, have you considered a 529 account?

Good point.

If OP is 100% going to save x dollars and use x dollars for college, then I can see not bothering with the ROTH. But if you don't know how much you will need and it's possible you will leave money in the ROTH (and eventually invest the money more aggressively), is usually more what I am thinking in these discussions. Particularly when talking to a "Saver". Just more, don't lose the tax shelter.

I would think that a 529 plan is pretty useless to OP, unless maybe they get a state tax break or have a large amount of wealth to tax shelter. If you have 0% investment gains, then a 529 plan just puts a lot of restrictions without any tax benefit. Financial aid is not a factor for us, so my brain never goes there, but would be something to consider with how you structure things if it is a factor in your planning.

[MonkeyMama]

I thought after 59 roth withdrawls were not taxable. We already paid taxes on roth contributions

correct

You can also access your contributions earlier because you have already paid taxes on them. It's the earnings/growth that is penalized if you withdraw early.

[snafu]

I'm one of those people with aa totally different viewpoint. Our [Cnd] market is crashing and I see it as a buying opportunity!
The issue with 529 accounts are current restrictions, will they be suitable for 1 y/o? Perhaps easier to assess 7 y/o. Since those funds will not be needed in 5 years, taking risk is a non issue. Money invested is not fixed, it can be moved to higher and lower risk products as the years progress and is advisable to create balance.

To be more comfortable, I suggest you look at DH's 401K. What is it's holdings? What is the balance? What is the progress? What is ascribed to DH's contributions, employer's contribution, growth? Is the breakdown best for age and future plans? I'm not suggesting making any changes, just examining to better understand the process of l-o-n-g term investment with unknown future costs.

The issue of straight up saving is that it doesn't keep up with inflation and you lose buying power every day. I see savings paying less than 1% and taxable, I see loans 7% - 12%, CC interest can be as high as 22%! Every week I see groceries increasing in spite of gas/transporttion dropping. I'm reaching for balance

[Nutria]

All of that said, with the 1-year-old at least I would seriously consider taking some more risk. You have time on your side.

This.

The general rule is to leave in cash what you need in 5-10 years.

Definitely not this!!

(You sound like my father... He opened a 529 for my children, and missed a huge run up in the stock market, just to protect himself from a downturn).

A 5-10 year target is waaaaay too long to have cash just sitting around.

Historically, 0-5 years is the cash threshold. 5-10 means that you own bonds. And by "own", I mean actually buy actual bonds with maturity dates near when you need the money.

[MonkeyMama]

This.

Definitely not this!!

(You sound like my father... He opened a 529 for my children, and missed a huge run up in the stock market, just to protect himself from a downturn).

A 5-10 year target is waaaaay too long to have cash just sitting around.

Historically, 0-5 years is the cash threshold. 5-10 means that you own bonds. And by "own", I mean actually buy actual bonds with maturity dates near when you need the money.

& on the flip side, this is why we weren't completely screwed in years 2001-2008, when most our peers were. It goes both ways.

You made me realize though that my wording was off. The recommendation is generally 0-5 years or 0-10 years, as to money not to invest in the stock market. I left out the 0-5 part. Exactly how much is a matter of opinion. I was speaking to OP who is being extremely conservative, so I figured they'd want the more conservative advice. I am trying to talk them out of keeping college money in cash for 18 years. My advice might be different to a different audience.

[Nutria]

& on the flip side, this is why we weren't completely screwed in years 2001-2008, when most our peers were. It goes both ways.

But if your kids graduated in 2012, and you put a lump sum in during 2000, it would have seen a modest gain. (I'm not sure how DCA would have done.)

Anyway, you don't leave it in stocks right up until you need it. Start converting it to cash or bonds 5 years beforehand.

[Nutria]

basically I want to put money in a roth and not take ANY risk

Here's a guarantee: despite what the government says, prices are rising. Thus, putting lots of your money in CDs for decades is guaranteed to buy a lot less in 2035 than in is in 2016.

[autoxer]

Anyway, you don't leave it in stocks right up until you need it. Start converting it to cash or bonds 5 years beforehand.

That's how my 529 account is setup. My children are age 1 & 3 and their college funds are currently invested in 100% stocks. I choose the option that automatically shifts with their age, so that it gradually reduces risk. First it shifts from stocks to bonds, then it shifts from bonds to short term reserves. It is just like my target date fund for retirement, but tailored for a different goal.

[LivingAlmostLarge]

Our kids are 6 and 3 now and 100% in stocks. Probably will be until around 15 and then shift. I don't plan on pulling it out 100% at 18. We are considering even loans and then pulling out at 22.

[Nutria]

We are considering even loans and then pulling out at 22.

Interesting. Why?

[LivingAlmostLarge]

College will be based on grades we've decided. Fail = pay your own way. Pass we'll happily foot the bill. They need skin in the game.