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Good evening all,

I recently started investing money into a Wealthfront personal account, and once creating it, I have started wondering what truly is most beneficial for me both long-term and short-term. I plan on buying a home within the next 2 years, so short-term is more of a concern right now, but would like to know how to properly switch to long-term as well. Through my research, a lot of questions have popped up:

From what I read, the profits made off of my investments is known as capital gains. The capital gains are taxable income, subject to federal tax based on my income, as well as state tax based on my state (stop me if I'm wrong somewhere here).

A Roth IRA also caught my attention as it is a retirement plan, but it allows me take the money out without incurring penalties as long as it's part of my contribution. This would allow me to build profit on my money but then take the money when needed and rebuild it later.

I decided to do some number crunching in a few scenarios to determine roughly what percent tax I'm looking at.

I am currently married, live in Massachusetts, and anticipate falling within the 15% tax bracket somewhere with my spouse for the next 2 years at least. After this period, I plan to quickly climb up through the 25% bracket and even possibly hit the 28% bracket.

Based on the fact that the 15% tax bracket does not incur any tax for long term investments for capital gain (from what I read), I don't have to worry about that income being taxed if held for at least a year. Massachusetts tax rate is 5.25%, so overall all I would pay just the 5.25%.

Because Roth IRAs still require federal taxes, I decided to convert my estimated income to an estimated pro-rated tax percent. Calculations put my actual tax percent around 13% here. Again, Massachusetts has a tax rate of 5.25%, so in total the tax rate on a Roth IRA would be 18.25% up front, since it is taxed up front.

From these numbers, it seems obvious that as long as I remain in these lower tax brackets with my spouse, the personal account seems like the way to go to avoid as much tax as possible. Is everything that I've said so far correct?

In the future, when my spouse and I start getting into the high end 15% bracket and push some income into the 25% tax bracket will be when taxes on the personal account start to build. There will be a 15% tax rate, plus the 5.25% state tax, making the tax rate 20.25%. This is when the Roth IRA will be better for a while, until our income eventually pushes our tax rate to be above 15% when prorated accordingly. At this point, it appears a personal account would once again be more effective than a Roth IRA. Is this correct as well?

At this point would be when it would be more beneficial to start investing in a traditional IRA to reduce my income and hopefully in the future I will fall in a lower tax bracket, thus saving me money, and essentially lowering my tax on the money.

So, my overall question is two-fold: For the short term, should I solely invest in the personal account until my combined income starts to hit a point of intersection? Or is there a benefit to maxing my Roth IRA right now, even though the taxes seem higher, and putting the remainder in my personal account after?

For the long-term, should I slowly switch between each one as I mentioned in my number crunching here, or is there some details I overlooked that you guys can make me aware of and point me in the right direction?

Thank you so much in advance for the advice, as I am rather young and completely new to this.

  • How are you employed (self-employed/w2 employee etc) and does your employer (if you have one) offer a 401k or other retirement/pension program? – quid Sep 28 '16 at 19:35
  • Complicated situation, but I am in the military. They have a 401k, but they don't match anything (weird, I know), so I have stopped investing in this a while back. Currently deployed, but aside from the military, I am a full time student juggling a part-time job or a summer internship. Part time jobs and internships don't apply for 401k's, thus 401k's have been completely ruled out. If it was an option, that's where I would have started. For at least the next 2 years, this is my situation, and hopefully once done with school will focus on a 401k with my fulltime job and this issue as a backup. – Trever Wagenhals Sep 28 '16 at 19:40
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The fact that you want to look for a home within the next 2 years (and the lack of 401(k) match) leads me to suggest saving for the house as top priority. A VA loan for that purchase. The VA loan has a very low up front fee, but a new home is always going to come with expenses that can add up. Better to have as much liquidity as you can. If you have a lot of cash after the move in and furnishings, it won't be tough to choose a high savings rate to jump start the retirement plan. Thank you for your service.

  • 1
    This was posted about 7 months ago, but just to elaborate on the situation, I have since found a condo, which unfortunately is not VA approved, but still a great deal. I have switched from the robo-advisor to a fidelity account where I maxed out last year's IRA contribution (Roth since my earnings were tax free in a combat zone, so my tax bracket is insanely low), and have put a decent amount in an individual account to grow. – Trever Wagenhals Apr 11 '17 at 7:16

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