Use a Roth IRA for long term savings?

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mc85741
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Joined: Sat May 15, 2021 2:59 pm

Use a Roth IRA for long term savings?

Post by mc85741 »

I'm 57 years old and will be completely out of debt in June when I have my car paid off. I don't plan on buying another car for at least 5 years. I'm planning on taking the $350/month that was going to the car payments and saving it so when I need to replace this current car, I can just buy it with cash.

My choices are either put it in a savings account and just lose money to inflation, put it in a taxable Fidelity account, or put it in a Roth IRA that I've had for probably 20 years at Fidelity. I'm thinking that the Roth IRA will be the best choice because the money will grow tax free as I don't anticipate using it at all before age 59 and I don't have to worry about the 5 year rule. I plan on investing the savings in recession-proof dividend growth stocks.

At my age, is there any downside to using a Roth IRA as a savings account as opposed to a taxable account? My income is such that I can contribute to the Roth IRA and I also have plenty of funds that are devoted solely for retirement and I do have emergency savings in an actual savings account.
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Lee_WSP
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Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Use a Roth IRA for long term savings?

Post by Lee_WSP »

Based on your scenario, I cannot think of any other than the contribution limit.
SuzBanyan
Posts: 2015
Joined: Thu Jun 02, 2016 11:20 am

Re: Use a Roth IRA for long term savings?

Post by SuzBanyan »

Just be aware that there is really no such thing as “recession-proof dividend growth stocks”.

And when it comes time to buy that new car, you may find it better to use funds from other accounts, even emergency funds if you have retired, than take money solely from a Roth that might still have years of tax-free growth.
whereskyle
Posts: 1911
Joined: Wed Jan 29, 2020 9:29 am

Re: Use a Roth IRA for long term savings?

Post by whereskyle »

mc85741 wrote: Sat May 15, 2021 3:20 pm I'm 57 years old and will be completely out of debt in June when I have my car paid off. I don't plan on buying another car for at least 5 years. I'm planning on taking the $350/month that was going to the car payments and saving it so when I need to replace this current car, I can just buy it with cash.

My choices are either put it in a savings account and just lose money to inflation, put it in a taxable Fidelity account, or put it in a Roth IRA that I've had for probably 20 years at Fidelity. I'm thinking that the Roth IRA will be the best choice because the money will grow tax free as I don't anticipate using it at all before age 59 and I don't have to worry about the 5 year rule. I plan on investing the savings in recession-proof dividend growth stocks.

At my age, is there any downside to using a Roth IRA as a savings account as opposed to a taxable account? My income is such that I can contribute to the Roth IRA and I also have plenty of funds that are devoted solely for retirement and I do have emergency savings in an actual savings account.
Dividend-growth stocks are not recession proof.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

They go down in lock-step with the market and tend to provide lower overall returns.

In 2008, they dropped 41% whereas the market dropped 50%, and in 2020 they dropped 17% whereas the market dropped 21%.

In 2020, they recovered from their drawdown in August AFTER the market had recovered from its drawdown in July.

Absolutely do not invest in dividend-growth stocks on the premise that they are recession proof. That premise is false.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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retiredjg
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Joined: Thu Jan 10, 2008 11:56 am

Re: Use a Roth IRA for long term savings?

Post by retiredjg »

Welcome to the forum. :happy And congrats on being almost out of debt!

I think you are asking the wrong question. You are asking about where to hold the money rather than what to invest the money in.

Money you want to use in 5 years should probably not be invested in stocks at all. If there is a market downturn, your money will simply not be there when you want it/need it. If you simply must use stocks, it should be a small portion of the money, not all of it - maybe 20% in stocks.

I suggest a short or intermediate term bond fund (or a mix of the two), tax-exempt if you are in a high tax bracket.

Your plan to continue saving a "car payment" is a good one. I used this method when I was younger. After a few years, I was always able to buy cars with cash even though I was in a low paying job much of that time.


Agree with the others about "recession -proof dividend growth stocks".
CPonzi
Posts: 22
Joined: Fri Aug 10, 2018 7:37 pm

Re: Use a Roth IRA for long term savings?

Post by CPonzi »

What about an isavings bond? You have to hold them for a year, so from now till the end of year 4 you could stash money there. The last year (year 5) just put the money in a simple online savings account. You have to hold the bonds for 1 year minimum and lose the last 3 months interest if not held for at least 5 years but right now they are returning much more than a savings account (3.54% vs my ally savings account of 0.50%) and are very low risk. Either way, you're probably only talking a difference of a few hundred dollars, not thousands.

As others have said, the biggest downside to saving in your Roth IRA is the contribution limit which you'd be better off letting grow if you are in a financial position to do so. The second downside is risking needing the money during a downturn in the market. It hurts to think about losing out on returns but it would also be real painful having to realize losses and the benefits of maximizing your Roth IRA contribution limits. If you were really set on investing it, I'd maximize Roth IRA contributions first then use a brokerage account for the car savings, not touching the Roth until retirement. You could also split it, maximize Roth IRA (right now $6k), then put 50% in brokerage index fund and 50% in ibond or savings. If the market tanks right when you need it, hello beater car :happy

Congrats on being almost out of debt!
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