Cashing out Roth IRA not making any money

[puma1552]

I asked this on another forum but nobody answered the actual question, instead giving me advice on what to do with my money, so I'll try here.

I'm 26. I have a Roth IRA I started when I was 22. I've made max contributions each year:

2007: $4000
2008: $5000
2009: $5000
2010: $2300 (so far)

So the total contributions have been $16,300. As of today, 3-4 years later, the value is $16,100.

So my question is simple: If I cashed this out today, would I be any worse off in 30 years than someone else who's 26 and started a Roth IRA today (all other things exactly equal)?

Basically, would someone who started a Roth IRA at 26 be any worse off than someone who started one at 22 but has made zero money on it up til age 26?

 

[Rodimus Prime]

remember the market goes up and down. It is the just the way it goes. I would just leave it alone money in the Roth is just going to sit there until you retire. Plus you have 16k saved up that you would not of had saved up if you didn't do it.

 

[maflynn]

What financial instruments are used your IRAs?

The general rule of thumb is the younger you are, the more risk you can take, since you're on a long term, big picture type of mode. As you get closer to retirement, moving the money to safer alternatives is typically the advice provided.

As for pulling out the money, it makes little sense, since you'll realize the loss at this point.

 

[steve2112]

Don't cash it out. You have a long time to let it grow, and it will. You may want to look at where you have your money invested, though. The U.S. market is way up from its March 2009 low point, so you should have seen some growth. You probably want to re-allocate your funds to some that are performing better.

 

[obeygiant]

You'll be taxed if you take it out now. I believe it matures when your 59 and a half.

The Roth IRA is just a window though, put some of it in QQQQ and the rest in a tech mutual fund or a gold mutual fund and just forget about it. It'll make money.

 

[mobilehaathi]

My god, you're impatient. Stop watching your investment day to day. Contribute then forget about it. Your investments are likely just recovering from the late 2008 crash. Your thinking is waaaay too short term. This is a retirement account!!!

 

[puma1552]

My god, you're impatient. Stop watching your investment day to day.

I only check it once every four months or so?

If we could stick to the question at hand, the actual numerical difference between someone starting one at 26 and someone starting it at 22 but having made no money on it, that would be great--an answer/comparison long-term to those two situations is what I'm really after here.

The how or why of why I may or may not cash it out is not very relevant for this thread.

 

[callmemike20]

You really aren't thinking about an IRA correctly. It's NOT about quick gains. It IS about long term growth. In 2007, when you started your IRA, the DJI was over 14,000. Today, the DJI is struggling to stay over 10,000. Basically, the market moves up and down. In fact, your 2009 contribution of $5,000 probably made you the most money because the market was up 65% last year (you probably didn't make 65%, could be more or less). However, you are probably still recovering from your 2007 and 2008 investment. 2010 has been up and down, so it really depends on when that money was invested and in what investments.

We are in the greatest decline since the Great Depression. Now is the time to buy, especially if you are young and can take the risk. The S&P 500 is actually a better representation of market performance.
http://www.standard.com/annuities/eforms/13038.pdf

That will show you the annual returns of the S&P 500 since 1968. As you can see, 2008 saw a nearly 40% drop. We aren't out of the recession yet, and I personally believe we are headed for a double dip recession. You should definitely keep your money in the market, just maybe reconsider where you are investing it. The goal should be to beat the S&P. Take 2008 for example. If you only lost 25% in 2008, you would be better off than the S&P, and it would be a good thing. When the S&P is up 5%, you may shoot for 6% or 7%. In the end, the market always goes up. By the time you retire in 30+ years, you will have a lot more money than you invested. That is unless there is another recession. However, you are young and should have no reason to not keep your IRA. If you were retiring right now, well, that would be another story.

 

[callmemike20]

I only check it once every four months or so?

If we could stick to the question at hand, the actual numerical difference between someone starting one at 26 and someone starting it at 22 but having made no money on it, that would be great--an answer/comparison long-term to those two situations is what I'm really after here.

The how or why of why I may or may not cash it out is not very relevant for this thread.

You are better off starting at age 22. Because you started during a bad economic time, you are showing some losses. However, you have to look at the fundamentals of an IRA.

1) You can only contribute $5,000/year (I believe that's what it is now). So, if you started at age 22, at age 26, you can have a maximum investment of $20,000. If you were to start at age 26, you would only have $5,000 invested.

I know why you are questioning starting your investment at age 22 as opposed to age 26, but let me throw a few more things at you:

1) You are down very little in terms of potential growth. Your $16,000 has the potential to be worth much more than they currently are primarily because you are investing during a recession. Even big businesses are hurting, but eventually, the strong ones will come out of it and boom again. With many saying the worst is over, and you are only down $200, that's not bad. However, you might want to consider reallocating your funds in your IRA because you could be up a little right now.

2) Someone who starts at age 26 in year 2010 could only contribute $5,000. That's all the money they have that can benefit from this recession. If they took the same percentage loss as you, they would only have $4938.

 

[Rolvag]

Puma;

As a Certified Financial Adviser we can look at this 2 ways, assuming you make no additional contributions.

Cash Out, You will be subject to a 10% IRS Penalty PLUS you will loose the ROTH IRA Tax Free Status. In other words, the year you cash out, the money you receive will be added to your current income and taxed at your current rate. If that tax rate is 25%, plus the 10% penalty, you will net $10,400 if you cashed out.

Keep the IRA, Based on the current value of $16,100, and assuming a 8% market average return and having you retire at age 65 you will have $323,856 in the account (TAX FREE!, WITHOUT ADDITIONAL CONTRIBUTIONS). If you cash out now you will have $0 guaranteed.

 

[callmemike20]

Puma;

As a Certified Financial Adviser we can look at this 2 ways, assuming you make no additional contributions.

Cash Out, You will be subject to a 10% IRS Penalty PLUS you will loose the ROTH IRA Tax Free Status. In other words, the year you cash out, the money you receive will be added to your current income and taxed at your current rate. If that tax rate is 25%, plus the 10% penalty, you will net $10,400 if you cashed out.

Keep the IRA, Based on the current value of $16,100, and assuming a 8% market average return and having you retire at age 65 you will have $323,856 in the account (TAX FREE!, WITHOUT ADDITIONAL CONTRIBUTIONS). If you cash out now you will have $0 guaranteed.

I was actually just doing this calculation as well. I was going to edit it into my comment about potential growth.

EDIT: If you started at 26, that $5,000 investment would only be worth $100,576.49 at age 65 (with no additional contributions). The return of 8% is key because the more money you invest when you are young, the more compounded **interest** (return is the more accurate term) it will receive.

 

[puma1552]

You are better off starting at age 22. Because you started during a bad economic time, you are showing some losses. However, you have to look at the fundamentals of an IRA.

1) You can only contribute $5,000/year (I believe that's what it is now). So, if you started at age 22, at age 26, you can have a maximum investment of $20,000. If you were to start at age 26, you would only have $5,000 invested.

I know why you are questioning starting your investment at age 22 as opposed to age 26, but let me throw a few more things at you:

1) You are down very little in terms of potential growth. Your $16,000 has the potential to be worth much more than they currently are primarily because you are investing during a recession. Even big businesses are hurting, but eventually, the strong ones will come out of it and boom again. With many saying the worst is over, and you are only down $200, that's not bad. However, you might want to consider reallocating your funds in your IRA because you could be up a little right now.

2) Someone who starts at age 26 in year 2010 could only contribute $5,000. That's all the money they have that can benefit from this recession. If they took the same percentage loss as you, they would only have $4938.

Thanks, this is what I thought and was looking for confirmation of. Trust me when I started it, and until very recently (in fact I just made contributions in April), I've never once thought under any circumstance to cash it out until I'm 60 and it's matured, and to strive to make max contributions every year.

Unfortunately other financial things not looking so hot just has me exploring options. Don't really care to spend the next 8.5 years paying off $18.8k in student loans when I also have to start looking into a possible marriage, mortgage, vehicle, moving home from abroad without being able to search for a job until I get home in a year, etc.

 

[puma1552]

Puma;

As a Certified Financial Adviser we can look at this 2 ways, assuming you make no additional contributions.

Cash Out, You will be subject to a 10% IRS Penalty PLUS you will loose the ROTH IRA Tax Free Status. In other words, the year you cash out, the money you receive will be added to your current income and taxed at your current rate. If that tax rate is 25%, plus the 10% penalty, you will net $10,400 if you cashed out.

Why would the Roth IRA proceeds be added to my income and taxed, when the principle of a Roth IRA is that contributions are made with post-tax dollars? If the above is true, then they are taxing me twice on my money--once before I put it in, and once when I take it out.

Keep the IRA, Based on the current value of $16,100, and assuming a 8% market average return and having you retire at age 65 you will have $323,856 in the account (TAX FREE!, WITHOUT ADDITIONAL CONTRIBUTIONS). If you cash out now you will have $0 guaranteed.

Thanks, my calculations were running in that ballpark but I wasn't sure I was calculating right, so good to see confirmation.

 

[Sun Baked]

If you want earnings, you can have it transferred to a high risk Roth IRA program.

But alas they are high risk for a reason, since you can lose it all.

Only put what you can afford to lose 100% of in those programs.

Right now you are at 98% on your Roth, while some in the higher earning programs that sent money to Bernard Madoff are at 0%.

 

[Rolvag]

Why would the Roth IRA proceeds be added to my income and taxed, when the principle of a Roth IRA is that contributions are made with post-tax dollars? If the above is true, then they are taxing me twice on my money--once before I put it in, and once when I take it out.



Thanks, my calculations were running in that ballpark but I wasn't sure I was calculating right, so good to see confirmation.

You are correct, you will be taxed twice, but that will be the penalty imposed by the IRS. I can calculate why you would or would not want to pay off your student loan as opposed to keep making the contributions to the ROTH IRA. We can also look at other means of retirement that are tax free that will offer other benefits over and above the ROTH. Keep in mind the Roth is Tax Free Today, The Gov could and may change that status in the future to help solve the growing national debt. MHO

 

[BigPrince]

The major characteristic of an IRA is long term investment...

I like to think you are incredibly lucky. You are investing at a time when everything is cheaper then typical because of a weak economy. In 35 or so years when you finally start taking distributions from your IRA, I bet these years will be your most profitable actually or on par with the rest of the ups and downs that the market characteristically tends to trend.

Your IRA is young and still has at least 30 years to recover and grow.

Everybody would want to put money in and see it grow immediately, but that's no reality. Taking that money out right now would be the biggest mistake you ever made up to this point IMO.

(I am 22 with 4 years of max contribution under by belt and in a similar situation as you in terms of the return on my IRA)

 

[rowsdower]

Cash Out, You will be subject to a 10% IRS Penalty PLUS you will loose the ROTH IRA Tax Free Status. In other words, the year you cash out, the money you receive will be added to your current income and taxed at your current rate. If that tax rate is 25%, plus the 10% penalty, you will net $10,400 if you cashed out.

This is not true. Penalties and taxes are not assessed on contributions. You can withdraw up to the total of your contributions at any time without penalty. See here for discussion and links to IRS publications. Since you have contributed more than the current value, you can cash out with no penalty and no additional taxes. In fact, you could recognize a loss of $200 if you cashed it out now (see "Recognizing Losses on Investments" in Publication 590).

Whether it is a good idea to cash out or not is a different discussion. The real penalty (as someone else pointed out) is that if you take the money out you can't put it back, because of the yearly contribution limits.

 

[Rolvag]

corrected

 

[rowsdower]

I'm afraid, your are indeed, incorrect in your statement. You will suffer a 10% penalty of your account value regardless of your contribution to date. I would speak to a IRS agent or CFP or CPA.

You definitely do not add withdrawn contributions to your income. Publication 590 is very clear about that. From "Are Distributions Taxable":

You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s).

The basis of property distributed from a Roth IRA is its fair market value (FMV) on the date of distribution, whether or not the distribution is a qualified distribution.

Regarding the 10% penalty, Publication 590 is slightly less clear. From "Additional Tax on Early Distributions":

Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions.

Also, the form for reporting the withdrawal and calculating the penalty is Form 5329:

Complete this part if you took a taxable distribution...

(Emphasis mine in both cases.)

My interpretation is that since the distribution was not taxable, it is not subject to the 10% penalty. If you search Google, I don't think you will find a single reference stating that withdrawn contributions are subject to any tax or penalty (at least, I didn't). Obviously that is not authoritative. It's possible that my interpretation is wrong, but it is at least not unusual.

Probably the easiest thing to do would be to call the IRS. They have a free phone line for questions and they probably aren't too busy this time of year.

If you have some sort of reference substantiating your claim that contributions are subject to the 10% penalty, I would really like to see it.

 

[djjclark]

Think people are mixing up rules for traditional IRA's and Roth IRA's. Rowsdower is correct to my knowledge.

 

[Rolvag]

:d

 

[Rolvag]

:d

 

[rhsgolfer33]

My interpretation is that since the distribution was not taxable, it is not subject to the 10% penalty. If you search Google, I don't think you will find a single reference stating that withdrawn contributions are subject to any tax or penalty (at least, I didn't). Obviously that is not authoritative. It's possible that my interpretation is wrong, but it is at least not unusual.

Probably the easiest thing to do would be to call the IRS. They have a free phone line for questions and they probably aren't too busy this time of year.

If you have some sort of reference substantiating your claim that contributions are subject to the 10% penalty, I would really like to see it.

You are correct, there is no penalty assessed on the withdrawal of contributions since withdrawal of contribution isn't considered a taxable distribution (presumably because you already paid taxes on your contribution to the Roth IRA before you made that contribution). In the case of a Roth IRA, a taxable distribution only involves the distribution of earnings. Fool.com has a good example.

 

[puma1552]

Question about the five-tax-year rule (I never knew about this before)--is this a one time period or is this always in effect for the last five years' worth of contributions?

i.e. if I retire at 65 and want to cash it out, would the entire things (contributions and earnings) be completely tax free or would only contributions/earnings to age 60 (or whatever age 5 tax years falls at) be totally tax free, with a five tax year rule being applied to the last five years' contributions?

I'm pretty sure it's the former and not the latter but I just want to make sure.

 

[rhsgolfer33]

Question about the five-tax-year rule (I never knew about this before)--is this a one time period or is this always in effect for the last five years' worth of contributions?

i.e. if I retire at 65 and want to cash it out, would the entire things (contributions and earnings) be completely tax free or would only contributions/earnings to age 60 (or whatever age 5 tax years falls at) be totally tax free, with a five tax year rule being applied to the last five years' contributions?

I'm pretty sure it's the former and not the latter but I just want to make sure.

Here is a good Wall Street Journal piece answering that question.

I believe the 5 year holding period starts the year you make your first contribution to the Roth IRA.