Does a Roth IRA make sense for my situation?

[sethmachine]

I'm an early career professional (almost two years into my first post grad job) and I make just over six figures in salary. I have some student debt: 7K@5.00%, 15K@3%ish and 20K@0% (yes I have a zero percent interest loan that will never have any interest). I also will likely need to purchase a vehicle in the next 6 months. I have been taking advantage of my company's maximum 401K match, which has an amazing return, though I'm not contributing the maximum voluntary to my 401K, as that doesn't get matched anymore.

My long term goal is financial independence. I don't care for having a nice car, traveling the world, or a big house. I'd like to accumulate enough wealth so I could raise a family and provide for my children everything they would need (I don't have children yet). I also want to help my immediate family as well, especially in retirement. I want to hold off starting a family until I start making a lot more money.

I recently consulted with a retirement professional about financial planning. He advised me against paying off my remaining student debt aggressively, and instead hold on to the money. He was a strong advocate of having liquid assets, and told me it'd be a mistake to pay the 7K loan off in full.

His advice was that I should start a Roth IRA and max out my contribution yearly. The reasoning was that I could withdraw the principal at anytime, and also the gains would accumulate tax-free and would have no taxes if I took them out at 59 1/2.

I've been doing more reading, and lots of suggestions say if you are in the 15% bracket, you should use a Roth IRA. I'm already spilling into the 28% bracket. The next bracket is 33%, which starts just under 200K.

My take away is that a Roth IRA makes sense if in the future I'll be in a higher tax bracket?

I think it's possible I could get to the 33% bracket at some point, but who knows.

[dczech09]

I recently consulted with a retirement professional about financial planning. He advised me against paying off my remaining student debt aggressively, and instead hold on to the money. He was a strong advocate of having liquid assets, and told me it'd be a mistake to pay the 7K loan off in full.

His advice was that I should start a Roth IRA and max out my contribution yearly. The reasoning was that I could withdraw the principal at anytime, and also the gains would accumulate tax-free and would have no taxes if I took them out at 59 1/2.

I've been doing more reading, and lots of suggestions say if you are in the 15% bracket, you should use a Roth IRA. I'm already spilling into the 28% bracket. The next bracket is 33%, which starts just under 200K.

My take away is that a Roth IRA makes sense if in the future I'll be in a higher tax bracket?

I think it's possible I could get to the 33% bracket at some point, but who knows.

Yes, I would do the Roth IRA. But I would also fire the financial advisor because he is clearly only interested in his commissions.

Why do I say that? Because he recommended that you stop paying on student loans so you can invest more. Gee I wonder why a retirement professional would recommend that

I would open the Roth IRA and invest $5,500 for the 2016 year - you can invest for the 2016 year up until tax day in 2017. As long as you earn less than $117K, you can invest the full amount in the Roth IRA.

I would ALSO aggressively pay down student loans. You make six figures so that should be easy to do.

It would not be a mistake to pay off the $7k student loan as fast as possible. The retirement guy is hinting that you could potentially earn more than 5% on investing (which is true), however you are not factoring risk into that analysis. There is risk that the market could crash (or just fall a little). Also, once you factor in taxes and inflation, your real return probably won't cover 5%; if it does, it will be by a small margin.

[disneysteve]

I completely agree with dczech.

1. Open the Roth and fully fund it for as many years as you qualify.
2. Pay off the 5% loan ASAP.
3. Turn and run from the sleazy "retirement professional" who doesn't know what the hell he's talking about.

If your income is on a steep climb, you will lose Roth eligibility at some point so you might as well take full advantage of it while you can.

[feh]

I completely agree with dczech.

1. Open the Roth and fully fund it for as many years as you qualify.
2. Pay off the 5% loan ASAP.
3. Turn and run from the sleazy "retirement professional" who doesn't know what the hell he's talking about.

If your income is on a steep climb, you will lose Roth eligibility at some point so you might as well take full advantage of it while you can.

I would add step 4: if you still have surplus income, max out (or at least increase) your 401K contribution.

[disneysteve]

I'm curious where the 0% loan came from. A family member, perhaps?

[Jluke]

My long term goal is financial independence. I don't care for having a nice car, traveling the world, or a big house. I'd like to accumulate enough wealth so I could raise a family and provide for my children everything they would need (I don't have children yet). I also want to help my immediate family as well, especially in retirement. I want to hold off starting a family until I start making a lot more money.

While increasing income does help, what really helps is not having a lot of debt or expenses (i.e. monthly payments that are eating up your cash flow).

[MakeAStash]

Most people fall into a lower tax bracket during retirement. In general if you expect to be in a higher tax bracket during retirement, use Roth now, otherwise stick with traditional.

If your contribs to traditional won't be tax deductible it's better to skip the IRA entirely and invest the money outside an IRA.

[Nika]

The younger you are, the more years of growth your money have ahead, the more sense ROTH IRA makes. If you are a young high earner, ROTH is the best options for you.

[snafu]

I add my voice to the others emphasizing the value of contributing to a cost, self managed ROTH [like Vanguard] for 2016. Contributions Sept. - April 2017, all valid for 2016. The magic of compounding is strongly related to contribution in your early work years. You will definitely have to ride out the vagaries of the market but the benefits over 35 years is huge. Posted by Tom Hole...

https://dl.dropboxusercontent.com/u/...0You%20Can.pdf

[kv968]

I wouldn't be so quick, as other's are, to dismiss the advisor's suggestion of not "aggressively" paying down the student loan.

You're creeping up on, or are already in, 6-figure territory with your salary but that doesn't necessarily mean you're flush with money. My question would be, could you do other things while also paying aggressively on the student loan?

Do you have an emergency fund in place and if not can you get one together quickly while paying aggressively on the loan?

Can you fully fund a Roth while doing the same? If you can't fully fund it and aggressively pay the loan as well, I'd go with your advisor's suggestion and max out the Roth first since you can't go back and do it after the fact.

I'm not saying to let the loan hang around forever and if you have the means to do the above AND tackle that student loan then by all means have at it. However, in my opinion, if you're missing out on maxing out the Roth or can't afford to get together an emergency fund because you're aggressively paying down a 5% loan (3.6% after interest deduction in 28% tax bracket) you're missing out on opportunities.

Granted having a 6-figure salary one would assume that you should be able to do all of those easily but that's not always the case. And if it's not the case, you may want to listen to the advisor's recommendation. However if you do have the money...then knock that loan out.

[GoodSteward]

Good advice given so far. I stand behind paying off debt quickly to free up cash flow and increase savings potential. However, a big mistake is to tie up all your cash flow without having a reserve. The Dave Ramsey idea would still work here, but you might have to adjust the figures. You said you wanted to save for a car as well. If you put that off by paying off your loan you run the risk of having to finance a car, which means a loss of cash flow. You need to figure up how big a shovel you have(budget) and how quickly you can recover from tieing up money in an IRA or Loan payoff. I have made the mistake many times of aggressively paying off a debt just to turn around and get in a bind by not having enough cash on hand for things. My shovel isn't as big as others on this site :P

Just last night at church I was trying to explain compound interest to the youth and how time is on your side when you are young. I'm sure a lot didn't get it, but I wanted to introduce them to it(The lesson was on being trustworthy and responsible stewards). If you start young enough, you won't ever have to worry about stressing over making sure you have enough for retirement, you can let the money work for you. Just don't get yourself in a bind by having no cash on hand or cash flow.