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Max Roth now, or contribute monthly?
Old 03-21-2013, 09:31 AM   #1
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Max Roth now, or contribute monthly?

I feel like I saw a thread about this here but can't seem to find it. (So if anyone knows where it is, please link!)

I can't decide if I should contribute to my Roth in one lump sum at the beginning of the year (or now, as I am a bit behind), or contribute on a monthly basis.

If I contribute now, the funds basically come out of savings, currently earning a sorry 1%. Then during the year I would replenish the savings with what would have gone into the Roth had I been contributing monthly.

Any thoughts on which you would prefer, and why? Annually at "start" of year or monthly?

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Old 03-21-2013, 10:46 AM   #2
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Right away if you have the funds available, so that the gains over the year can grow tax free.

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Old 03-21-2013, 10:51 AM   #3
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Make sure you never contribute more than your earned income, just to be safe. So I wouldn't contribute the whole amount on Jan 1.

Otherwise, you want to do it in a way that maximizes the value in your Roth account. That will generally be a large amount at the beginning of the year. That way as your investments, on average, increase in value throughout the year, you will end the year with your contribution amount plus market gains in the Roth.

Of course it may not work out that way all the time. But if you do it often enough it should average to your favor.

Part of the problem as you've laid it out is that you are in cash in a taxable account and I assume you are going to be in equities or your normal AA in the Roth. That adds "market timing" to the situation. Go ahead and invest the cash in a taxable brokerage account if it is supposed to be part of your portfolio. Then all you have to worry about is tax gains and losses (ideally losses in taxable and gains in Roth) instead of portfolio timing.
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Old 03-21-2013, 01:00 PM   #4
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Why not do it quarterly? You can cost average into your investment(s) and still be dealing with a sufficient amount each time if you are investing into something other than a mutual fund.
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Old 03-21-2013, 01:06 PM   #5
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I always just lump-summed it into my IRA when I had it available, and I never did any back-calculations a year later to try and see if I should have done it differently. I reckoned that in 20 years of paying a lump sum into the IRA's that it would average out.

It is much more significant that you are putting money into an IRA rather than how you are putting it in.
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Old 03-22-2013, 03:44 AM   #6
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If your MAGI is anywhere close to the limit, I'd hold off. I thought we'd have a really nice cushion between our MAGI and the limit, and then some unforeseen windfall pushed us into the phase-out range, after we had already made full contributions. I'm happy about the windfall but backing-out the excess contributions was a little bit of a chore.

As an aside: I just received a letter from the brokerage confirming the backing-out of the excess contributions. The letter says that the gains are taxable in the year of the contributions. That has got to be wrong - so clearly so in my mind that I'm not even going to check. It makes no sense: If you're backing contributions out because your MAGI is too high, and that adds to your MAGI, and so you'd have to back-out more contributions - lather, rinse, repeat! They better have meant that the gains on the excess contributions are taxable in the year the backing-out was executed. They made it clear that they're not even sending a statement about it until next January.
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Old 03-22-2013, 06:47 AM   #7
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Thanks everyone for the advice!

We are way below the income limits, I guess that is both a fortunate and unfortunate fact... I currently earn around 90K.

Animorph, thanks for the tidbit on not contributing more than your earned income. It makes me feel better for not being on top of things! I'd have to wait a few pay periods to make lump sum contributions to both my Roth and DH's Roth (we are a one income family.

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