This post has been started in response to the following topic here and the idea for it was originally suggested in that topic by ETFNerd.
I'm hoping to find High yield CD's and/or Money Market accounts inside Roth IRA's. Ideal suggestions will be banks that offer no fee, no minimum IRA's AND offer high yield insured investments. I would prefer to ignore the various Money FUNDS or cash reserve funds offered by brokerage houses like Fidelity. These funds are relatively safe, but not FDIC insured, and require a brokerage account. (I admit this reason is partially selfish as I am series 7 licensed and am not allowed to hold brokerage accounts outside my firm)
The idea of putting cash reserves into a Roth IRA can be a very beneficial practice for many. Contributions can be withdrawn tax and penalty free at any time, and the interest (gains) can be left in the account and then withdrawn tax and penalty free in a qualified withdrawl. Also, your after tax Rate of Return is substantially higher when no federal taxes are paid on your interest. Example a 5% CD with someone in the 25% tax bracket means an after tax return of 3.75%. The same 5% CD in a roth actually gets you the full 5% (state taxes may apply). Or, another illustration is that the 5% CD in Roth is equivalent to a 6.66% Cd outside a Roth.
Essentially, what we are doing is stowing our cash reserves in a Roth, and instead of paying the taxes on the interest earned, we are letting the interest be part of our retirement money sometime down the road. It is likely that the interest should be used to purchase a better long term investment (like stocks) since the gains cannot be touched until retirement-or another qualified reason. See irs.gov for details.
If you are maxing out your Roth contributions every year for retirement and investing in equities and bonds-good for you. You can ignore this post. However, if you're not maxing out your Roth's for whatever reason, or if you are like myself and live on a joint income of about 60k, married and cannot afford to contribute 8k annually to your Roth IRA's for retirement, this post is for you.
A sound financial house means a decent cash reserves, and if you're not maxing out your Roths, and don't need the interest income, this is a good idea. Now we just need to find who has the best options
So far the only thing I have found that meets my criteria is E-Trade Bank which has 1 year IRA Cd's at 5.3% and no fee, no min. IRA's. The money market account is nothing special. Any ideas are much appreciated.
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I'm in a higher tax bracket currently and am aggressively paying CC debt down, however in the next year I expect to have no CC debt and less income. Tax benefits from continued contribution to a traditional IRA or 401k will be lessened, and I'll be looking to create an emergency fund. Sounds like Roths are the best option.
A couple related questions I've been wondering: I know $4k/person is the limit, or $8K total for a couple. Can you open Roths in children's names for their eventual retirement? What is the deadline for annual contributions, EOY (Dec 31st of each year) or can you contribute retroactively up to tax day, like you can with a traditional IRA? IOW, if I were to get a $20K bonus April 5th, could my wife and I invest $8K for 2006 on April 10th and $8K for 2007 on April 20th?
I'm in a higher tax bracket currently and am aggressively paying CC debt down, however in the next year I expect to have no CC debt and less income. Tax benefits from continued contribution to a traditional IRA or 401k will be lessened, and I'll be looking to create an emergency fund. Sounds like Roths are the best option.
A couple related questions I've been wondering: I know $4k/person is the limit, or $8K total for a couple. Can you open Roths in children's names for their eventual retirement? What is the deadline for annual contributions, EOY (Dec 31st of each year) or can you contribute retroactively up to tax day, like you can with a traditional IRA? IOW, if I were to get a $20K bonus April 5th, could my wife and I invest $8K for 2006 on April 10th and $8K for 2007 on April 20th?
I contributed my 2005 ROTH IRA contribution in late March and my 2006 ROTH IRA contribution in early May of this year.
Discusses ROTH IRAs for Minors Apparently, the kid needs to make taxable income in order to contribute it to a ROTH. Setting up a personal business and then paying $4K to the kid to show up one once a year at the place of business isn't going to cut it - you'll need documentation that you paid them a fair rate and actual work was done. -g
Let's remember that for most people, the benefits of the roth IRA comes from many years of compounding. The return in a riskier investment over a longer horizon is "expected" to be greater, so you "should" reap a greater benefit than being in a cash account. If you choose carefully, you can easily beat inflation by carefully choosing high yielding MM investments, but it is unlikely that you are maximizing the Roth IRA benefit in this way.
Another pet peeve that I have is with the folks who use the Roth for a home downpayment vehicle or an emergency funds vehicle. Once you take that money out for your short term needs, you cannot replace it and you are giving up a future stream of compounding. Not the best choice in my opinion unless you expect your home appreciation to wildly outpace returns in other asset classes. This is not what has happened historically.
Arcanlaw said:What is the deadline for annual contributions, EOY (Dec 31st of each year) or can you contribute retroactively up to tax day, like you can with a traditional IRA? IOW, if I were to get a $20K bonus April 5th, could my wife and I invest $8K for 2006 on April 10th and $8K for 2007 on April 20th?
The deadline for IRA or ROTH IRA contribution is any Apr 15th of current year for the prior year. Essentially you have 1 year plus Apr 15th of next for any year. So you can contribute to current AND prior year simultaneously before Apr 15th by specifying the YEAR for each.
FWgunn said:Discusses ROTH IRAs for Minors Apparently, the kid needs to make taxable income in order to contribute it to a ROTH. Setting up a personal business and then paying $4K to the kid to show up one once a year at the place of business isn't going to cut it - you'll need documentation that you paid them a fair rate and actual work was done. -g
To add a little to this topic. I am planning to setup my oldest daughter to work for my new company. It is an LLC that is owned wholly by me. Anyhow, in this situation, she pays no FICA, therefore I pay no FICA match, and also pay no unemployment insurance. She essentially becomes a "FREE" employee, because there is no extra overhead in hiring her, other than her pay/benefits (no benefits necessary as she is a minor). So, up to the $5150 standard deducation in 2006, she is tax free (could be more if she has other deductions). I am going to have her fully-fund a Roth IRA, and use the remainder to fund a Coverdell ESA.
This turns into a great education savings plan. Roth IRAs are not considered in financial aid calculations, whereas 529s and Coverdells are. Any funds taken from a Roth IRA, contributions and/or earnings, are tax free for education purposes. So, here is the plan. Fully fund Roth IRA every year. Fund a Coverdell ESA with the remainder. Withdrawal from the Coverdell ESA first, for education, and when it is depleted, withdrawal from the Roth IRA. Any contributions that are left over could be used for a down payment on a home, and the everything else that is not withdrawn stays for retirement. Another advantage is that with Coverdell ESAs, you have to use all the funds by the time you are 30, or gift them to another eligible person, or you have to pay penalties. By depleting the Coverdell ESA first, you leave the bulk in an IRA that can stay around for a long time.
ETFnerd said:Let's remember that for most people, the benefits of the roth IRA comes from many years of compounding. The return in a riskier investment over a longer horizon is "expected" to be greater, so you "should" reap a greater benefit than being in a cash account. If you choose carefully, you can easily beat inflation by carefully choosing high yielding MM investments, but it is unlikely that you are maximizing the Roth IRA benefit in this way.
Another pet peeve that I have is with the folks who use the Roth for a home downpayment vehicle or an emergency funds vehicle. Once you take that money out for your short term needs, you cannot replace it and you are giving up a future stream of compounding. Not the best choice in my opinion unless you expect your home appreciation to wildly outpace returns in other asset classes. This is not what has happened historically.
I agree a roth is best utilized when you put the money in, and leave it alone. But for someone who can't afford to max out their roth contributions for retirement in any given year, still needs to build a cash reserve, but even still needs to save for retirement, there's nothing wrong with stowing that cash in high yielding cash investments in a Roth. The above criteria may appear a unique situation, but it is a common one among young professionals.
Dus10 said: To add a little to this topic. I am planning to setup my oldest daughter to work for my new company. It is an LLC that is owned wholly by me. Anyhow, in this situation, she pays no FICA, therefore I pay no FICA match, and also pay no unemployment insurance. She essentially becomes a "FREE" employee, because there is no extra overhead in hiring her, other than her pay/benefits (no benefits necessary as she is a minor). So, up to the $5150 standard deducation in 2006, she is tax free (could be more if she has other deductions). I am going to have her fully-fund a Roth IRA, and use the remainder to fund a Coverdell ESA.
This turns into a great education savings plan. Roth IRAs are not considered in financial aid calculations, whereas 529s and Coverdells are. Any funds taken from a Roth IRA, contributions and/or earnings, are tax free for education purposes. So, here is the plan. Fully fund Roth IRA every year. Fund a Coverdell ESA with the remainder. Withdrawal from the Coverdell ESA first, for education, and when it is depleted, withdrawal from the Roth IRA. Any contributions that are left over could be used for a down payment on a home, and the everything else that is not withdrawn stays for retirement. Another advantage is that with Coverdell ESAs, you have to use all the funds by the time you are 30, or gift them to another eligible person, or you have to pay penalties. By depleting the Coverdell ESA first, you leave the bulk in an IRA that can stay around for a long time.
Good idea. But your daughter may be a rebel when she's 18, take the money from her roth, take off with her boyfriend Jamal, and the next time you see her will be on a Girls Gone Wild video.
ok, maybe not, but the money's hers, and she can do whatever she wants with it-power you may not want to give an 18 year old. especially when she discovers she's got about 100k.
wilsonshmilson said: I would prefer to ignore the various Money FUNDS or cash reserve funds offered by brokerage houses like Fidelity. These funds are relatively safe, but not FDIC insured, and require a brokerage account. (I admit this reason is partially selfish as I am series 7 licensed and am not allowed to hold brokerage accounts outside my firm)
The above is not always true. For example Fidelity offers "mutual fund accounts", which are not full-service brokerage accounts, but still allow you to invest in any of the funds they have. These accounts are specially designed for people in the industry like you. I'm also registered and employed by a broker-dealer, however I'm not restricted from having mutual fund accounts, since they don't allow trading in individual securities.
Twould seem like the vast majority of young professionals who can't afford to max out a roth would be in low tax brackets - making this use of a roth rather iffy. If they're in the 25% or higher bracket they should probably try harder and max out their roth.
manuel said:Twould seem like the vast majority of young professionals who can't afford to max out a roth would be in low tax brackets - making this use of a roth rather iffy. If they're in the 25% or higher bracket they should probably try harder and max out their roth.
Perhaps sell their bmw or their prius.
I think that when you are in a lower tax bracket, Roths make more sense. You are already in a tax advantaged state because you are in a low bracket. How much gain would you get from putting the funds in a traditional, since you are in such a low tax bracket, anyway?
"Good idea. But your daughter may be a rebel when she's 18, take the money from her roth, take off with her boyfriend Jamal, and the next time you see her will be on a Girls Gone Wild video."
Too late, I already saw his daughter in GGW 2020 edition. Me and doc Brown were there in our Dilorean.
wilsonshmilson said:Dus10 said: To add a little to this topic. I am planning to setup my oldest daughter to work for my new company. It is an LLC that is owned wholly by me. Anyhow, in this situation, she pays no FICA, therefore I pay no FICA match, and also pay no unemployment insurance. She essentially becomes a "FREE" employee, because there is no extra overhead in hiring her, other than her pay/benefits (no benefits necessary as she is a minor). So, up to the $5150 standard deducation in 2006, she is tax free (could be more if she has other deductions). I am going to have her fully-fund a Roth IRA, and use the remainder to fund a Coverdell ESA.
This turns into a great education savings plan. Roth IRAs are not considered in financial aid calculations, whereas 529s and Coverdells are. Any funds taken from a Roth IRA, contributions and/or earnings, are tax free for education purposes. So, here is the plan. Fully fund Roth IRA every year. Fund a Coverdell ESA with the remainder. Withdrawal from the Coverdell ESA first, for education, and when it is depleted, withdrawal from the Roth IRA. Any contributions that are left over could be used for a down payment on a home, and the everything else that is not withdrawn stays for retirement. Another advantage is that with Coverdell ESAs, you have to use all the funds by the time you are 30, or gift them to another eligible person, or you have to pay penalties. By depleting the Coverdell ESA first, you leave the bulk in an IRA that can stay around for a long time.
Good idea. But your daughter may be a rebel when she's 18, take the money from her roth, take off with her boyfriend Jamal, and the next time you see her will be on a Girls Gone Wild video.
ok, maybe not, but the money's hers, and she can do whatever she wants with it-power you may not want to give an 18 year old. especially when she discovers she's got about 100k.
I have been thinking about this. My plan is to raise a responsible daughter, but what can I do as a backup? I got $60K when I turned 18, and tax penalties did not stop me from blowing it. What about putting the IRA in a trust? Has anyone ran through this situation? Then you can have control over the funds of your child. Is that even feasible?
ETFnerd said:Let's remember that for most people, the benefits of the roth IRA comes from many years of compounding. The return in a riskier investment over a longer horizon is "expected" to be greater, so you "should" reap a greater benefit than being in a cash account. If you choose carefully, you can easily beat inflation by carefully choosing high yielding MM investments, but it is unlikely that you are maximizing the Roth IRA benefit in this way.
Another pet peeve that I have is with the folks who use the Roth for a home downpayment vehicle or an emergency funds vehicle. Once you take that money out for your short term needs, you cannot replace it and you are giving up a future stream of compounding. Not the best choice in my opinion unless you expect your home appreciation to wildly outpace returns in other asset classes. This is not what has happened historically.
ETFnerd, you brought up a point that i never thought about....that you cannot put money back into a roth once you take it out. Is that really true? Does any roth IRA experts know how that works? But then again, how many people are going to actualy replace an emergency withdraw regardless of what type of savings account it is in (MM accounts outside of retirement accounts or roth, etc) assuming that it REALLY was an "emergency." And say you do withdaw some money for emergency and want to replace it, just put it back in a high yield money market account (outside your Roth) where everybody else puts their emergency funds who doesn't have a ROTH IRA.
somdave2005 said:ETFnerd said:Let's remember that for most people, the benefits of the roth IRA comes from many years of compounding. The return in a riskier investment over a longer horizon is "expected" to be greater, so you "should" reap a greater benefit than being in a cash account. If you choose carefully, you can easily beat inflation by carefully choosing high yielding MM investments, but it is unlikely that you are maximizing the Roth IRA benefit in this way.
Another pet peeve that I have is with the folks who use the Roth for a home downpayment vehicle or an emergency funds vehicle. Once you take that money out for your short term needs, you cannot replace it and you are giving up a future stream of compounding. Not the best choice in my opinion unless you expect your home appreciation to wildly outpace returns in other asset classes. This is not what has happened historically.
ETFnerd, you brought up a point that i never thought about....that you cannot put money back into a roth once you take it out. Is that really true? Does any roth IRA experts know how that works? But then again, how many people are going to actualy replace an emergency withdraw regardless of what type of savings account it is in (MM accounts outside of retirement accounts or roth, etc) assuming that it REALLY was an "emergency." And say you do withdaw some money for emergency and want to replace it, just put it back in a high yield money market account (outside your Roth) where everybody else puts their emergency funds who doesn't have a ROTH IRA.
Yea, you could just put it in a MM, and then when you get to your "catch up" years, you can put those funds back in the IRA.
somdave2005 said:ETFnerd said:Let's remember that for most people, the benefits of the roth IRA comes from many years of compounding. The return in a riskier investment over a longer horizon is "expected" to be greater, so you "should" reap a greater benefit than being in a cash account. If you choose carefully, you can easily beat inflation by carefully choosing high yielding MM investments, but it is unlikely that you are maximizing the Roth IRA benefit in this way.
Another pet peeve that I have is with the folks who use the Roth for a home downpayment vehicle or an emergency funds vehicle. Once you take that money out for your short term needs, you cannot replace it and you are giving up a future stream of compounding. Not the best choice in my opinion unless you expect your home appreciation to wildly outpace returns in other asset classes. This is not what has happened historically.
ETFnerd, you brought up a point that i never thought about....that you cannot put money back into a roth once you take it out. Is that really true? Does any roth IRA experts know how that works? But then again, how many people are going to actualy replace an emergency withdraw regardless of what type of savings account it is in (MM accounts outside of retirement accounts or roth, etc) assuming that it REALLY was an "emergency." And say you do withdaw some money for emergency and want to replace it, just put it back in a high yield money market account (outside your Roth) where everybody else puts their emergency funds who doesn't have a ROTH IRA.
I replace my emergency fund. Actually, for me I don't really have an "emergency fund" per se. I have a "loan to myself" account. When I need money, I take a loan against this account and pay myself back with interest. I set up my automatic bank transfers to pay myself back. It's like I'm the banker!
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