Max out Roth in Jan or dollar cost average

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rex
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Max out Roth in Jan or dollar cost average

Post by rex »

Hi Investment Gurus,

I read somewhere that missing the best market days can dramatically lower investment returns.

So i was wondering if i should max out my and DW's roth IRA in Jan or put a fixed sum each month ?

thanks,
Rex
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Clever_Username
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Re: Max out Roth in Jan or dollar cost average

Post by Clever_Username »

Can you put the maximum into the Roth IRA before you've earned $5500 in 2013?

Assuming you can, it's the same argument as the usual DCA vs lump sum: the latter has a higher expected return, but the former avoids the biggest possible regret (investing lump sum followed by an immediate drop). For a perfectly rational investor, the lump sum at once is the better strategy.
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rex
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Re: Max out Roth in Jan or dollar cost average

Post by rex »

Hmm I'm not sure if i can put 5500 in roth before my payday in Jan - are there any laws restricting it i.e., I have to fun 2013 roth from my 2013 income only ?
Default User BR
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Re: Max out Roth in Jan or dollar cost average

Post by Default User BR »

rex wrote:Hmm I'm not sure if i can put 5500 in roth before my payday in Jan - are there any laws restricting it i.e., I have to fun 2013 roth from my 2013 income only ?
No.

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englishgirl
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Re: Max out Roth in Jan or dollar cost average

Post by englishgirl »

You ARE dollar cost averaging, even if you put it all in in January. You'd be making a contribution every January spread out over 30 or so years.

Really, you're just worrying about the frequency of dollar cost averaging - bi-weekly, monthly or annually. If you have the money and want to do it at once, then do it. You will likely gain some advantage from being in the market for the full year. If you don't have the money set aside, and you can only contribute per paycheck, I wouldn't worry about the difference.
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Re: Max out Roth in Jan or dollar cost average

Post by FillorKill »

rex wrote:Hi Investment Gurus,

I read somewhere that missing the best market days can dramatically lower investment returns.

So i was wondering if i should max out my and DW's roth IRA in Jan or put a fixed sum each month ?

thanks,
Rex
As a fellow non-Guru, ask yourself how this: "max out my and DW's roth IRA in Jan or put a fixed sum each month" would have worked [so far] in 2012?

You should expect that same result roughly 2 out of 3 years.

You are investing because you anticipate a positive return, yes? You want as much time in the market [compounding] as possible, yes?

At the same rate some just are not comfortable with lump-summing.

Only you have to live with the result of your decision here.
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Re: Max out Roth in Jan or dollar cost average

Post by empb »

Make the contribution as soon as you can.
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Re: Max out Roth in Jan or dollar cost average

Post by livesoft »

I don't contribute the max to a Roth at the beginning of the year unless I am putting the money into a bond fund.

Later on in the year, I can usually find something that is lower priced than it was at the beginning of the year (even in 2012) and that's what I invest new money my Roth IRA in.
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Re: Max out Roth in Jan or dollar cost average

Post by retiredjg »

I don't think this question has one answer. I think you have to compare lump sum into Roth IRA to where the money will be if you don't lump sum into Roth IRA.

One option would be a situation where you are keeping some of your money out of the market hoping that getting into the market later will pay more. But what's happening with the money sitting on the sidelines? Not much.... If it is sitting in a savings account and your Roth IRA contains stocks, the Roth IRA has a greater expected return. Of course, you'll have to check back in a year to find approach which actually had the better return.

But on the other hand, if you are paying off credit card debt at 15% instead of lumping the money into Roth IRA, paying off the credit card debt is obviously the better choice.
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rex
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Re: Max out Roth in Jan or dollar cost average

Post by rex »

thanks for the thoughts and insights guys.

The money is just sitting in a savings account - i plan to invest 5500 in a bond fund and 5500 in a stock fund. I did not contribute lumpsum this year because i did not have ready cash - but i think i'd have liked the results if i did. Seems like i'll be putting in the full amount this Jan though.
sunspotzsz
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Re: Max out Roth in Jan or dollar cost average

Post by sunspotzsz »

just max it out in january and forget about it.
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Re: Max out Roth in Jan or dollar cost average

Post by LAlearning »

rex wrote: I read somewhere that missing the best market days can dramatically lower investment returns.

Doubling up on the worst days would also be nice. But who has the time to figure out the future?

And yes, you can max out before you have earned the income assuming the cash is available. But if you will make less than 5.5k for the year, you need to remove the excess.

So dump it in, mix around to re-balance to your desired liking, grab a coffee and sit back and relax until Jan 1, 2014.

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tfb
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Re: Max out Roth in Jan or dollar cost average

Post by tfb »

Market almost always goes down after Jan. 2. Waiting would work most of the time.

Image
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Re: Max out Roth in Jan or dollar cost average

Post by DSInvestor »

The contribution to Roth IRA and investment can be two separate events. If you're certain that you will be eligible for full Roth IRA contribution, contribute the full 5K at the start of the year even if you want to DCA. You could contribute to a MMF or short term bond fund in the Roth IRA and then DCA from that fund to other funds throughout the year. This is what I did when I frontloaded my SEP-IRA contributions at the start of the year.

My concern about contributing to Roth IRA at the start of the year was whether or not I would be eligible since I had highly fluctuating income.
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Re: Max out Roth in Jan or dollar cost average

Post by midareff »

Iwas doing deferred compensation to maximize my IRA over the course of the year and then liked to do the ROTH as early in the year as possible so I could feel I had finished up all my tax advantaged spaces before moving on to taxable investments.
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Re: Max out Roth in Jan or dollar cost average

Post by grabiner »

tfb wrote:Market almost always goes down after Jan. 2. Waiting would work most of the time.

Image
But that's a comparison between the best and the worst day of the year, and you don't know the worst day in advance. The real issue is whether the market will be higher on January 1 or whatever other day you choose to invest, and on the average, the market will be higher on that other day.

If you did the same chart starting on July 1 rather than January 1, you would find the same result; in most years, the market will be lower on some day between July 1 and the next June 30, but that isn't a reason to avoid investing on July 1.
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tfb
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Re: Max out Roth in Jan or dollar cost average

Post by tfb »

grabiner wrote:But that's a comparison between the best and the worst day of the year, and you don't know the worst day in advance.
No that's a comparison between Jan. 1 and the worst day, not between the best and the worst. Although you don't know the worst day in advance, you can set a [small] limit below the price on Jan. 1. The chart shows the limit would be hit in most years if you are not too greedy in setting the limit.
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Re: Max out Roth in Jan or dollar cost average

Post by Mel Lindauer »

englishgirl wrote:You ARE dollar cost averaging, even if you put it all in in January. You'd be making a contribution every January spread out over 30 or so years.
Englishgirl beat me to it, so I'll simply say "That's what I was going to say!". :)
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Re: Max out Roth in Jan or dollar cost average

Post by 555 »

tfb wrote:
grabiner wrote:"But that's a comparison between the best and the worst day of the year, and you don't know the worst day in advance."
"No that's a comparison between Jan. 1 and the worst day, not between the best and the worst. Although you don't know the worst day in advance, you can set a [small] limit below the price on Jan. 1. The chart shows the limit would be hit in most years if you are not too greedy in setting the limit."
Have you analysed this? Say you decide to wait until either it's X% below Jan 1 price*, or you buy at the end of the year regardless of price (*and dividends need to be considered). I strongly doubt your strategy could work. Maybe it'd be a good topic for a separate thread.
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Re: Max out Roth in Jan or dollar cost average

Post by 555 »

Mel Lindauer wrote:
englishgirl wrote:"You ARE dollar cost averaging, even if you put it all in in January. You'd be making a contribution every January spread out over 30 or so years."
"Englishgirl beat me to it, so I'll simply say "That's what I was going to say!". :)"
And Mel beat me to saying englishgirl beat me to it.
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Re: Max out Roth in Jan or dollar cost average

Post by tfb »

555 wrote:Say you decide to wait until either it's X% below Jan 1 price*, or you buy at the end of the year regardless of price (*and dividends need to be considered). I strongly doubt your strategy could work. Maybe it'd be a good topic for a separate thread.
If I show setting the limit to X% worked in the past people will say backtesting can't be trusted because past performance does not predict future performance. So I think this will be one of those unprovable things.
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Re: Max out Roth in Jan or dollar cost average

Post by dickenjb »

If there is any chance your income will be too high to contribute directly to a Roth it is better to wait until the following year. You have until April of the following year to make current year contributions.
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Re: Max out Roth in Jan or dollar cost average

Post by thebogledude »

why not DCA from Jan to April 15th for 2012? You don't have to lump sum all in Jan and you have four months of cost averaging.
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Re: Max out Roth in Jan or dollar cost average

Post by DSInvestor »

thebogledude wrote:why not DCA from Jan to April 15th for 2012? You don't have to lump sum all in Jan and you have four months of cost averaging.
You'd probably need to manually make each purchase from Jan 2013 to April 15, 2013 to code it for tax year 2012. I believe automated purchases will assume 2013 tax year if the transactions occur in calendar 2013.
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Re: Max out Roth in Jan or dollar cost average

Post by 555 »

tfb wrote:
555 wrote:Say you decide to wait until either it's X% below Jan 1 price*, or you buy at the end of the year regardless of price (*and dividends need to be considered). I strongly doubt your strategy could work. Maybe it'd be a good topic for a separate thread.
If I show setting the limit to X% worked in the past people will say backtesting can't be trusted because past performance does not predict future performance. So I think this will be one of those unprovable things.
You could assume stocks follow a random walk so it becomes a purely mathematical problem.
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Re: Max out Roth in Jan or dollar cost average

Post by tfb »

555 wrote:You could assume stocks follow a random walk so it becomes a purely mathematical problem.
Guess so. Beyond my math skills. I wonder if gummy looked at this.
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Re: Max out Roth in Jan or dollar cost average

Post by crumbgrabber »

dickenjb wrote:If there is any chance your income will be too high to contribute directly to a Roth it is better to wait until the following year. You have until April of the following year to make current year contributions.
As far as I know, I don't think it's a problem to proceed with the backdoor Roth conversion even if your income isn't too high--you could always do this if you were anxious to get your money invested. You can determine at tax-time if you can deduct any contributions.
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Re: Max out Roth in Jan or dollar cost average

Post by SpringMan »

You can max out an IRA before you earn the income. There is a risk you earn too much or too little but you can always recharacterize if you have to. You can max out and dollar cost average by initially using a money market fund in the IRA. This way you can transfer into to mutual funds on RBDs (Really Bad Days coined by livesoft).
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Re: Max out Roth in Jan or dollar cost average

Post by Call_Me_Op »

rex wrote:Hi Investment Gurus,

I read somewhere that missing the best market days can dramatically lower investment returns.

So i was wondering if i should max out my and DW's roth IRA in Jan or put a fixed sum each month ?

thanks,
Rex
I wouldn't waste my time dollar-cost averaging in this case. If you were talking about a million bucks, I might give a different opinion.
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Re: Max out Roth in Jan or dollar cost average

Post by zvez »

I'm sitting on a pile of cash right now as I've liquidated almost all of my stocks in readiness to move into vanguard funds. With tremendous help here, I've decided to opt for the vanguard target date fund across the board.

That said I've put some money in to the funds, but I'm going to wait for some settlement on the "fiscal cliff" issue. My feeling is they won't reach an agreement, the market will dip substantially and I can buy everything cheaper. My thought is why buy it today, when I can wait for a few weeks to see what/if any resolution.

I have read the market timing/dca articles linked in this forum. Technically to wait is market timing, BUT clearly a huge potential exists for market swings January.

Chris
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Re: Max out Roth in Jan or dollar cost average

Post by retiredjg »

Yeah, maybe, but...what if they get their act together and the market takes a big upswing because people are so excited to see the government actually functioning again and your money is sitting on the sidelines......

That market timing sword cuts both ways. :twisted:
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Re: Max out Roth in Jan or dollar cost average

Post by zvez »

absolutely, you're 100% correct. They could surprise and actually settle, tho I think they'll just extend and kick the can down the road. I'll wait at the risk of missing out on the start of a bull market.
retiredjg wrote:Yeah, maybe, but...what if they get their act together and the market takes a big upswing because people are so excited to see the government actually functioning again and your money is sitting on the sidelines......

That market timing sword cuts both ways. :twisted:
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Re: Max out Roth in Jan or dollar cost average

Post by Aptenodytes »

zvez wrote:I'm sitting on a pile of cash right now as I've liquidated almost all of my stocks in readiness to move into vanguard funds. With tremendous help here, I've decided to opt for the vanguard target date fund across the board.

That said I've put some money in to the funds, but I'm going to wait for some settlement on the "fiscal cliff" issue. My feeling is they won't reach an agreement, the market will dip substantially and I can buy everything cheaper. My thought is why buy it today, when I can wait for a few weeks to see what/if any resolution.

I have read the market timing/dca articles linked in this forum. Technically to wait is market timing, BUT clearly a huge potential exists for market swings January.

Chris
It is unlikely you really believe this if you did wouldn't you be buying etfs that are indexed to rise when the market falls?
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Re: Max out Roth in Jan or dollar cost average

Post by Toons »

Time is your ally,invest it all as soon as you can :happy
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