Roth contributions from Taxable Brokerage Account?

[mountainsoft]

I currently contribute to our Roth accounts with monthly contributions pulled from our checking account (dollar cost averaging).

Would there be any downside to paying the full $7000 contribution (over age 50 catch-up) as a lump sum each January from our taxable brokerage account instead? We already have the money sitting in the taxable account, but I want to make sure we wouldn't incur some kind of additional tax doing this. I would rather pay it all at the start of the year and not worry about having enough in checking for the automatic transfer each month.

 

[bada bing]

I make my yearly Roth contributions on the first business day of the year as a transfer from my brokerage account to the Roth account. Most brokerages make it easy and keep track of your yearly contributions.

There are only two potential downsides I can think of. One is the capital gains tax that might be triggered by selling something appreciated in your brokerage account to make the Roth contribution. The other possibility is either not earning enough during the year to cover the Roth contribution or earning too much to qualify for a direct Roth contribution. If you are reasonably sure neither of those will happen, the sooner the better for making your Roth contributions.

 

[mountainsoft]

I make my yearly Roth contributions on the first business day of the year as a transfer from my brokerage account to the Roth account. Most brokerages make it easy and keep track of your yearly contributions.

There are only two potential downsides I can think of. One is the capital gains tax that might be triggered by selling something appreciated in your brokerage account to make the Roth contribution. The other possibility is either not earning enough during the year to cover the Roth contribution or earning too much to qualify for a direct Roth contribution. If you are reasonably sure neither of those will happen, the sooner the better for making your Roth contributions.

Awesome, thanks. Yes, we earn enough to qualify for the contributions, but not so much to not qualify. I don't know why this option never occurred to me before. It would simplify a number of things including not having to set money aside each month for the contribution, or figuring out how to evenly divide 7000 by 12 months.

I already contributed the full 7K to my wife's Roth earlier this year when we opened it. I might go ahead and contribute the remainder of mine for this year to and do away with the monthly contributions.

 

[SecondCor521]

Yup, totally fine. Did it that way myself for the last several years I was working.

In fact, it's in theory slightly better than monthly contributions, as those funds start growing tax free inside the Roth on average six months sooner.

If you do end up in any of the situations @bada bing mentions, then you can either recharacterize the Roth contribution to a traditional IRA contribution or reverse it, whichever is necessary. Also, if you're in the phase out range, recharacterizations and reversals can be partial.

 

[pb4uski]

I currently contribute to our Roth accounts with monthly contributions pulled from our checking account (dollar cost averaging).

Would there be any downside to paying the full $7000 contribution (over age 50 catch-up) as a lump sum each January from our taxable brokerage account instead? We already have the money sitting in the taxable account, but I want to make sure we wouldn't incur some kind of additional tax doing this. I would rather pay it all at the start of the year and not worry about having enough in checking for the automatic transfer each month.

Like others have said the only downside is if something happens and you don't have $7k of earned income to qualify to make that much of a contribution, but then you could do a recharacterization and reverse it (and yes, you can still recharacterize contributions... you just can't any longer recharacterize conversions).

 

[PaddyMac]

Yes, we have been doing this the past few years. We try to find something at the end of December to sell at a loss (tax loss harvesting when we file our taxes), then we reinvest the funds in early January in our Roth IRAs.