Best place to gradually save $6000 to max-out Roth IRA contribution in January

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Cranberry44
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Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by Cranberry44 » Sun May 17, 2020 2:05 pm

Hello!

Is there a recommend method for saving/"storing" $6,000 over the course of each year for the purpose of maxing out a Roth IRA contribution at the start of each new year?

My initial thought is to gradually over-fund an emergency fund by $6,000, and then transfer it to my Roth IRA for each new year. Is this the best option, or are there other recommended means of doing this?

Thanks so much -- I'm a long time lurker, but only recently found myself in a position to start saving in earnest.

**EDIT:** As some have suspected, I have already contributed the max amount 2020 (I did so in January 2020). My question is about preparing for 2021 (and each year after). I was convinced by other threads that maxing out the yearly contribution as lump sum in early January is more efficient than spreading out the contributions over the course of a year. Happy to change my approach though! Thanks so much for all your insights!!

**EDIT 2 (May 20):**
Based on advice received thus far in this thread, my current situation is:
1) I have maxed my 2020 IRA contribution (fully funding in January)
2) I am now purchasing VTI in a taxable, with possibility of selling them to fund my 2021 Roth in 01/2021 (see below).
3a) If by the end of the year I can TLH, I will, and repurchase VTI in Roth after 31 days.
3b) If by the end of the the year my VTI taxable position has a gain, I won't touch it, and will fund the Roth with new income.

Follow-up Question:
At step 2, should I be reinvesting dividends in this taxable account? Will that complicate 3a (or 3b) somehow?
Last edited by Cranberry44 on Mon May 25, 2020 7:20 pm, edited 4 times in total.

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David Jay
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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by David Jay » Sun May 17, 2020 2:51 pm

Welcome to the forum!

There is no reason, in my mind, to hold cash in expectation of contributing it to your Roth. I would put the money into your Roth as you collect it. I can see limiting it to 3–4 times a year for record keeping reasons (don’t want to over-contribute or under-contribute) but I would not wait. Get it into your Roth and get that money working for you.

In fact, if I can get together a few thousand by July 15 (special date this year for Covid), I would make a Roth contribution for 2019. Annual Roth space is lost if it is not used, I would try to use some of the 2019 space.

Then, contribute $2000 in October, $2000 in January and $2000 by April 15 ($6000 total for 2020 tax year).
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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by mortfree » Sun May 17, 2020 2:59 pm

I assume OP is preparing for 2021.

I overfund my EF then transfer the 6k in January of the new year.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by sycamore » Sun May 17, 2020 3:04 pm

David Jay wrote:
Sun May 17, 2020 2:51 pm
Welcome to the forum!

There is no reason, in my mind, to hold cash in expectation of contributing it to your Roth. I would put the money into your Roth as you collect it. I can see limiting it to 3–4 times a year for record keeping reasons (don’t want to over-contribute or under-contribute) but I would not wait. Get it into your Roth and get that money working for you.

In fact, if I can get together a few thousand by July 15 (special date this year for Covid), I would make a Roth contribution for 2019. Annual Roth space is lost if it is not used, I would try to use some of the 2019 space.

Then, contribute $2000 in October, $2000 in January and $2000 by April 15 ($6000 total for 2020 tax year).
I think Cranberry44 is talking about saving up for the next year's contribution. E.g., already contributed for 2020, now saving ahead for 2021.

Couple of options:
A) Invest the money in taxable using the same AA as the Roth.
- Potential downside #1 is that stocks drop between now and next January 1st, and you won't be able to contribute the full amount on January 1. But in that case you just make more contributions as you get more income over the next few months. And when you sell the funds in taxable (in order to contribute to Roth), you'll get to tax-loss harvest.
- Potential downside #2 is that stocks go way up so when you sell the funds in taxable (in order to contribute to Roth) you'll have short-term capital gains. But that's better than having a loss :)

Whether those downsides are bothersome enough is up to you.

B) Put money into low-risk fund or savings account or your EF as you suggested. Some kind of short-term bond fund or high-yield account. This approach is most likely to keep things simple. Main downside is you lose out on any stock market gain in the meantime.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by ruralavalon » Sun May 17, 2020 3:29 pm

Welcome to the forum :) .

Cranberry44 wrote:
Sun May 17, 2020 2:05 pm
Hello!

Is there a recommend method for saving/"storing" $6,000 over the course of each year for the purpose of maxing out a Roth IRA contribution at the start of each new year?

My initial thought is to gradually over-fund an emergency fund by $6,000, and then transfer it to my Roth IRA for each new year. Is this the best option, or are there other recommended means of doing this?

Thanks so much -- I'm a long time lurker, but only recently found myself in a position to start saving in earnest.
You could just contribute to the IRA every pay period during the year, rather than save the up for the next year's contribution.

If you have already contributed the annual maximum for 2020 and are saving for 2021, then in a taxable brokerage account you could invest in a very tax-efficient stock index fund like Vanguard Total Stock Market ETF (VTI), then sell enough in January 2021 to fund the annual Roth IRA contribution.
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L82GAME
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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by L82GAME » Sun May 17, 2020 4:49 pm

ruralavalon wrote:
Sun May 17, 2020 3:29 pm
Welcome to the forum :) .

Cranberry44 wrote:
Sun May 17, 2020 2:05 pm
Hello!

Is there a recommend method for saving/"storing" $6,000 over the course of each year for the purpose of maxing out a Roth IRA contribution at the start of each new year?

My initial thought is to gradually over-fund an emergency fund by $6,000, and then transfer it to my Roth IRA for each new year. Is this the best option, or are there other recommended means of doing this?

Thanks so much -- I'm a long time lurker, but only recently found myself in a position to start saving in earnest.
You could just contribute to the IRA every pay period during the year, rather than save the up for the next year's contribution.

If you have already contributed the annual maximum for 2020 and are saving for 2021, then in a taxable brokerage account you could invest in a very tax-efficient stock index fund like Vanguard Total Stock Market ETF (VTI), then sell enough in January 2021 to fund the annual Roth IRA contribution.
+1; agreed on DCA approach for 2020, and if topped up for 2020, generally agreed on VTSAX/VTI in taxable account for 2021 contribution but you don’t want to incur short term taxable gains subject to your marginal income tax rate. We use the latter approach, but we have aged holdings that allow us to do so at the lower LTCG tax rate.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by livesoft » Sun May 17, 2020 4:57 pm

L82GAME wrote:
Sun May 17, 2020 4:49 pm
+1; agreed on DCA approach for 2020, and if topped up for 2020, generally agreed on VTSAX/VTI in taxable account for 2021 contribution but you don’t want to incur short term taxable gains subject to your marginal income tax rate. We use the latter approach, but we have aged holdings that allow us to do so at the lower LTCG tax rate.
While it is true that ST gains are taxed more than LT gains, we also know that just putting cash in an interest-bearing savings account will create gains that are taxed at the same marginal income tax rate. Few people say: "Don't save in a savings account because the interest earned is taxed at your marginal income tax rate." Although I usually say that myself.

The idea to invest in a taxable account in the same way that the Roth would be invested is a good one.
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rkhusky
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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by rkhusky » Sun May 17, 2020 5:13 pm

Suppose you have $6,000 saved up in Total Stock Market in a taxable account. Would it be better to transfer that money to a Roth and then have the value drop to $5,000, or have the value drop to $5,000 and then transfer to the Roth?

The answer might tell you whether you need to worry about investing in your AA for next year’s contribution.

DeadLoad
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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by DeadLoad » Mon May 18, 2020 5:48 am

I have also wondered about the OP’s question. I didn’t see it mentioned in the responses but if the OP is on the fence with income restrictions and you are contributing to a Roth IRA all year and then at the end of the year you’ve made too much money for direct contributions, what happens? Do you then have to move the money into a traditional IRA then back door it into the Roth? Wouldn’t it be safer/easier to save it throughout the year in a taxable or high yield savings account and once January comes around put it in Roth or backdoor Roth?

FoolMeOnce
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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by FoolMeOnce » Mon May 18, 2020 7:00 am

sycamore wrote:
Sun May 17, 2020 3:04 pm
David Jay wrote:
Sun May 17, 2020 2:51 pm
Welcome to the forum!

There is no reason, in my mind, to hold cash in expectation of contributing it to your Roth. I would put the money into your Roth as you collect it. I can see limiting it to 3–4 times a year for record keeping reasons (don’t want to over-contribute or under-contribute) but I would not wait. Get it into your Roth and get that money working for you.

In fact, if I can get together a few thousand by July 15 (special date this year for Covid), I would make a Roth contribution for 2019. Annual Roth space is lost if it is not used, I would try to use some of the 2019 space.

Then, contribute $2000 in October, $2000 in January and $2000 by April 15 ($6000 total for 2020 tax year).
I think Cranberry44 is talking about saving up for the next year's contribution. E.g., already contributed for 2020, now saving ahead for 2021.

Couple of options:
A) Invest the money in taxable using the same AA as the Roth.
- Potential downside #1 is that stocks drop between now and next January 1st, and you won't be able to contribute the full amount on January 1. But in that case you just make more contributions as you get more income over the next few months. And when you sell the funds in taxable (in order to contribute to Roth), you'll get to tax-loss harvest.
- Potential downside #2 is that stocks go way up so when you sell the funds in taxable (in order to contribute to Roth) you'll have short-term capital gains. But that's better than having a loss :)

Whether those downsides are bothersome enough is up to you.

B) Put money into low-risk fund or savings account or your EF as you suggested. Some kind of short-term bond fund or high-yield account. This approach is most likely to keep things simple. Main downside is you lose out on any stock market gain in the meantime.
The thing is, neither of those are bad outcomes, really. Under A, you get to invest in your Roth at lower prices. Under B, you have more money after tax than if you had just held it in your emergency fund. The only downside with A is that your investment dropped regardless of what account it is in, but trying to avoid that has nothing to do with making your Roth deposit efficient and everything to do with market timing. And the damage would be slightly offset with harvesting the loss.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by 260chrisb » Mon May 18, 2020 7:07 am

Welcome!
Perhaps in your checking account if that's where you keep your emergency fund. I like the lump sum approach personally.You have seven months until you can do anything assuming you've maxed out 2019 and 2020 and gradually having more than what you normally have in your emergency fund over that period is an okay problem to have.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by terran » Mon May 18, 2020 7:14 am

DeadLoad wrote:
Mon May 18, 2020 5:48 am
I have also wondered about the OP’s question. I didn’t see it mentioned in the responses but if the OP is on the fence with income restrictions and you are contributing to a Roth IRA all year and then at the end of the year you’ve made too much money for direct contributions, what happens? Do you then have to move the money into a traditional IRA then back door it into the Roth? Wouldn’t it be safer/easier to save it throughout the year in a taxable or high yield savings account and once January comes around put it in Roth or backdoor Roth?
Yes, if you've contributed to Roth at any point during the year and then find out your income is too high to make Roth contributions you would either need to have the excess contribution removed or have the contributions recharacterized to traditional followed by a traditional to Roth conversion. If you thought this was likely you could just contribute to traditional and convert in the first place as there's nothing stopping someone who can contribute directly to Roth from making backdoor Roth contributions instead. Recharacterizing isn't a big deal. Recharacterizing a series of contributions would be somewhat more difficult than recharacterizing a single contribution for the custodian (have to calculate gains/losses on many contributions instead of one), but that doesn't effect the account owner.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by DeadLoad » Mon May 18, 2020 7:27 am

terran wrote:
Mon May 18, 2020 7:14 am
DeadLoad wrote:
Mon May 18, 2020 5:48 am
I have also wondered about the OP’s question. I didn’t see it mentioned in the responses but if the OP is on the fence with income restrictions and you are contributing to a Roth IRA all year and then at the end of the year you’ve made too much money for direct contributions, what happens? Do you then have to move the money into a traditional IRA then back door it into the Roth? Wouldn’t it be safer/easier to save it throughout the year in a taxable or high yield savings account and once January comes around put it in Roth or backdoor Roth?
Yes, if you've contributed to Roth at any point during the year and then find out your income is too high to make Roth contributions you would either need to have the excess contribution removed or have the contributions recharacterized to traditional followed by a traditional to Roth conversion. If you thought this was likely you could just contribute to traditional and convert in the first place as there's nothing stopping someone who can contribute directly to Roth from making backdoor Roth contributions instead. Recharacterizing isn't a big deal. Recharacterizing a series of contributions would be somewhat more difficult than recharacterizing a single contribution for the custodian (have to calculate gains/losses on many contributions instead of one), but that doesn't effect the account owner.
Right arm, thanks!

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by tibbitts » Mon May 18, 2020 8:53 am

Cranberry44 wrote:
Sun May 17, 2020 2:05 pm
Hello!

Is there a recommend method for saving/"storing" $6,000 over the course of each year for the purpose of maxing out a Roth IRA contribution at the start of each new year?

My initial thought is to gradually over-fund an emergency fund by $6,000, and then transfer it to my Roth IRA for each new year. Is this the best option, or are there other recommended means of doing this?

Thanks so much -- I'm a long time lurker, but only recently found myself in a position to start saving in earnest.
You're overthinking this, although I know Bogleheads like to extract the very last cent from every financial opportunitiy. But that's more of a hobby thing than something that will make a difference in life. I actually suggest waiting until later in the year to contribute, actually, at least until you know you'll actually qualify for the contribution. And yes I'd just keep the money in your high-yield savings or something similar.

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Cranberry44
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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by Cranberry44 » Mon May 18, 2020 9:37 am

Hi all -- thanks so much for all the insights -- I really appreciate it!

I wanted to draw attention to an edit I just made on my original post, even though most seem to have correctly inferred the context. Thanks again!
"**EDIT:** As some have suspected, I have already contributed the max amount 2020, (I did so in January 2020), and my question is about preparing for 2021 (and each year after). I was convinced by members in other threads that maxing out the yearly contribution as lump sum in early January is more efficient than spreading out the contributions over the course of a year. Happy to change my approach though! Thanks SO much for all your insights!!"

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by bloom2708 » Mon May 18, 2020 9:58 am

+1 for over funding cash/Emergency Fund.

I am saving $7k for each Roth and $4,500 for HSA balance (company puts in $2,500) for 2021.

I put these in the first couple days of January. I like having these "done" in early January to focus on other goals.
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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by terran » Mon May 18, 2020 2:59 pm

Cranberry44 wrote:
Mon May 18, 2020 9:37 am
Hi all -- thanks so much for all the insights -- I really appreciate it!

I wanted to draw attention to an edit I just made on my original post, even though most seem to have correctly inferred the context. Thanks again!
"**EDIT:** As some have suspected, I have already contributed the max amount 2020, (I did so in January 2020), and my question is about preparing for 2021 (and each year after). I was convinced by members in other threads that maxing out the yearly contribution as lump sum in early January is more efficient than spreading out the contributions over the course of a year. Happy to change my approach though! Thanks SO much for all your insights!!"
The problem with this assumption is that it is based on the fact that lump sum investing outperforms DCA on average (because the market goes up on average). So yes, it's better to get money invested as early in the year as possible. But what you're talking about is actually the opposite of lump sum investing. You're talking about not holding cash until you can invest in the IRA. In a lump sum investing sense, you should really be putting in the money into the market as soon as you have it, and that might mean investing the money you have available now in taxable and then slowly investing any money you have available next year in an IRA throughout the year.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by Robert20 » Mon May 18, 2020 3:13 pm

Cranberry44 wrote:
Sun May 17, 2020 2:05 pm
Hello!

Is there a recommend method for saving/"storing" $6,000 over the course of each year for the purpose of maxing out a Roth IRA contribution at the start of each new year?

My initial thought is to gradually over-fund an emergency fund by $6,000, and then transfer it to my Roth IRA for each new year. Is this the best option, or are there other recommended means of doing this?

Thanks so much -- I'm a long time lurker, but only recently found myself in a position to start saving in earnest.

**EDIT:** As some have suspected, I have already contributed the max amount 2020 (I did so in January 2020), and my question is about preparing for 2021 (and each year after). I was convinced by members in other threads that maxing out the yearly contribution as lump sum in early January is more efficient than spreading out the contributions over the course of a year. Happy to change my approach though! Thanks SO much for all your insights!!
As my experience, DCA works out better rather than one time payment. Paying $500 per month is best as per me but if u r OK then $1000 per month ..

If we know March 20th week is rock bottom, we can put entire 6K also but How can we be sure.!!?

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by JediMisty » Mon May 18, 2020 3:17 pm

DeadLoad wrote:
Mon May 18, 2020 5:48 am
I have also wondered about the OP’s question. I didn’t see it mentioned in the responses but if the OP is on the fence with income restrictions and you are contributing to a Roth IRA all year and then at the end of the year you’ve made too much money for direct contributions, what happens? Do you then have to move the money into a traditional IRA then back door it into the Roth? Wouldn’t it be safer/easier to save it throughout the year in a taxable or high yield savings account and once January comes around put it in Roth or backdoor Roth?
+1

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by Colorado13 » Mon May 18, 2020 5:24 pm

I save money each month in my Ally account (now paying a whopping 1.25%) and fund my Roth IRA in January each year using those funds. I would not invest money in the stock market if I needed that money within a year.

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cchrissyy
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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by cchrissyy » Mon May 18, 2020 5:34 pm

you don't need to wait until next january to put the money in the market. you can put it in a brokerage account all year long as you get it, invested in whatever you do in the ira. moving accounts after the new year is just housekeeping.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by tibbitts » Mon May 18, 2020 5:43 pm

Robert20 wrote:
Mon May 18, 2020 3:13 pm
Cranberry44 wrote:
Sun May 17, 2020 2:05 pm
Hello!

Is there a recommend method for saving/"storing" $6,000 over the course of each year for the purpose of maxing out a Roth IRA contribution at the start of each new year?

My initial thought is to gradually over-fund an emergency fund by $6,000, and then transfer it to my Roth IRA for each new year. Is this the best option, or are there other recommended means of doing this?

Thanks so much -- I'm a long time lurker, but only recently found myself in a position to start saving in earnest.

**EDIT:** As some have suspected, I have already contributed the max amount 2020 (I did so in January 2020), and my question is about preparing for 2021 (and each year after). I was convinced by members in other threads that maxing out the yearly contribution as lump sum in early January is more efficient than spreading out the contributions over the course of a year. Happy to change my approach though! Thanks SO much for all your insights!!
As my experience, DCA works out better rather than one time payment. Paying $500 per month is best as per me but if u r OK then $1000 per month ..

If we know March 20th week is rock bottom, we can put entire 6K also but How can we be sure.!!?
Statistically the market has historically risen, therefore the sooner the contribution the better. However if DCA makes you feel better, that's okay too. There isn't enough money involved in an annual IRA contribution that you will gain or lose a huge amount either way over many years.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by tibbitts » Mon May 18, 2020 5:46 pm

cchrissyy wrote:
Mon May 18, 2020 5:34 pm
you don't need to wait until next january to put the money in the market. you can put it in a brokerage account all year long as you get it, invested in whatever you do in the ira. moving accounts after the new year is just housekeeping.
You could, but you might have to contribute much more than the IRA annual maximum to still have that much available when it comes time to add to the IRA - so this only works if you have savings you can make beyond the IRA maximum.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by Triple digit golfer » Mon May 18, 2020 5:52 pm

If this is money to be invested and you're just waiting for the vehicle to be available, invest it in a taxable brokerage account in the interim. If it goes up, awesome, pay your capital gains taxes and be happy and move it to the IRA kn January 1. If it goes down, harvest the losses and transfer it over on January 1.

If the prospect of a loss in the interim makes you uncomfortable, then I would question if this money really should be invested at all.

Unless you're trying to time the market, there is no reason not to hold it in a taxable account until January 1.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by Tony-S » Mon May 18, 2020 6:13 pm

Cranberry44 wrote:
Sun May 17, 2020 2:05 pm
Is there a recommend method for saving/"storing" $6,000 over the course of each year for the purpose of maxing out a Roth IRA contribution at the start of each new year?
I just pile mine into a money market account then on Jan 2 I make the trade.

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FrankTheViking
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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by FrankTheViking » Mon May 18, 2020 6:27 pm

Assuming you invest any money in taxable, I would argue it simpler and more efficient to invest in that as you get the money, and then as soon as you can contribute to an IRA or other tax advantaged space for a new year, switch until full.
I would not want to have 6k I don't need waiting to be invested.
No EF. 80% Total U.S. / 20% Total International. 100% equity. Is there a gun to your head? Is there a tiger in the room? No? What's the problem?

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by Triple digit golfer » Mon May 18, 2020 6:36 pm

FrankTheViking wrote:
Mon May 18, 2020 6:27 pm
Assuming you invest any money in taxable, I would argue it simpler and more efficient to invest in that as you get the money, and then as soon as you can contribute to an IRA or other tax advantaged space for a new year, switch until full.
I would not want to have 6k I don't need waiting to be invested.
+1 Frank.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by FoolMeOnce » Mon May 18, 2020 6:43 pm

Triple digit golfer wrote:
Mon May 18, 2020 5:52 pm
If this is money to be invested and you're just waiting for the vehicle to be available, invest it in a taxable brokerage account in the interim. If it goes up, awesome, pay your capital gains taxes and be happy and move it to the IRA kn January 1. If it goes down, harvest the losses and transfer it over on January 1.

If the prospect of a loss in the interim makes you uncomfortable, then I would question if this money really should be invested at all.

Unless you're trying to time the market, there is no reason not to hold it in a taxable account until January 1.
Agreed

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by mortfree » Mon May 18, 2020 6:45 pm

What if 6k is < 1% of your total investments?

Would folks still advise investing until you can contribute it to a Roth?

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cchrissyy
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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by cchrissyy » Mon May 18, 2020 6:50 pm

the purpose of the money is to be invested for the long haul. the sooner you start the clock on that the better.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by fujiters » Tue May 19, 2020 4:50 am

mortfree wrote:
Mon May 18, 2020 6:45 pm
What if 6k is < 1% of your total investments?

Would folks still advise investing until you can contribute it to a Roth?
Why wouldn't we? Doesn't 6k being a relatively small chunk mean you'll easily be able to max out IRA limit on January 2 even after potential short term losses?

Or is the argument "no one sweats a 1% offset from their desired AA?" But why would you default to a slightly more cash heavy AA for money you plan to put into the market "ASAP"?
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by ruralavalon » Tue May 19, 2020 11:12 am

Triple digit golfer wrote:
Mon May 18, 2020 6:36 pm
FrankTheViking wrote:
Mon May 18, 2020 6:27 pm
Assuming you invest any money in taxable, I would argue it simpler and more efficient to invest in that as you get the money, and then as soon as you can contribute to an IRA or other tax advantaged space for a new year, switch until full.
I would not want to have 6k I don't need waiting to be invested.
+1 Frank.
+ 2.

mortfree wrote:
Mon May 18, 2020 6:45 pm
What if 6k is < 1% of your total investments?

Would folks still advise investing until you can contribute it to a Roth?
Yes. Why not have the money invested?
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Robert20
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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by Robert20 » Tue May 19, 2020 11:19 am

Open discover bank online savings account and fund IRA via that. Whatever money sitting there, it earns 1.5% interest.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by ruralavalon » Tue May 19, 2020 11:48 am

Robert20 wrote:
Tue May 19, 2020 11:19 am
Open discover bank online savings account and fund IRA via that. Whatever money sitting there, it earns 1.5% interest.
That is much less than market return most years. There is no reason not invest the money in a stock index fund like Vanguard Total Stock Market Index Fund (VTSAX) or the ETF version (VTI).
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by tashnewbie » Tue May 19, 2020 12:10 pm

ruralavalon wrote:
Tue May 19, 2020 11:12 am
Triple digit golfer wrote:
Mon May 18, 2020 6:36 pm
FrankTheViking wrote:
Mon May 18, 2020 6:27 pm
Assuming you invest any money in taxable, I would argue it simpler and more efficient to invest in that as you get the money, and then as soon as you can contribute to an IRA or other tax advantaged space for a new year, switch until full.
I would not want to have 6k I don't need waiting to be invested.
+1 Frank.
+ 2.
+3.

I think some people overcomplicate this, or maybe I value simplicity too much. Add to the Roth when you have the money. If you front-load it in the beginning of the year and you have extra money during the rest of the year, put it in your taxable account, and switch again at the start of the next calendar year until Roth is full.

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Cranberry44
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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by Cranberry44 » Tue May 19, 2020 5:41 pm

Thanks, all -- I really appreciate the help from each of you. I've decided to invest in VTI in a taxable account rather than save extra cash beyond my e-fund.

Here is my follow-up question:

Is is better to 1) sell from my taxable account to fund the Roth, or 2) to not touch the taxable and start funding the Roth once the new year begins?

Thank you!!

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by sycamore » Tue May 19, 2020 7:33 pm

Cranberry44 wrote:
Tue May 19, 2020 5:41 pm
Thanks, all -- I really appreciate the help from each of you. I've decided to invest in VTI in a taxable account rather than save extra cash beyond my e-fund.

Here is my follow-up question:

Is is better to 1) sell from my taxable account to fund the Roth, or 2) to not touch the taxable and start funding the Roth once the new year begins?

Thank you!!
3) It depends:
If your taxable position has a gain, don't sell as it'd be a short-term capital gain. Just fund the Roth using the new year's income.
If your taxable position has a loss, sell (tax-loss harvest) and use the proceeds to contribute to the Roth. Use income from the new year to top off the contribution as necessary. Use other income from the new year to buy shares in taxable.
Next year, repeat.

Or simplify things by making periodic contributions to both Roth and taxable during the year as your income allows. Leave your taxable positions as-is. Don't bother trying to fully fund the Roth on January 2. That won't hurt you really given you're able to contribute to taxable and Roth (which is great).

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by mortfree » Tue May 19, 2020 7:41 pm

If your position has a loss be sure to sell prior to the new tax year (2021) so you can claim it on your 2020 taxes.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by grabiner » Tue May 19, 2020 9:27 pm

sycamore wrote:
Tue May 19, 2020 7:33 pm
Cranberry44 wrote:
Tue May 19, 2020 5:41 pm
Thanks, all -- I really appreciate the help from each of you. I've decided to invest in VTI in a taxable account rather than save extra cash beyond my e-fund.

Here is my follow-up question:

Is is better to 1) sell from my taxable account to fund the Roth, or 2) to not touch the taxable and start funding the Roth once the new year begins?

Thank you!!
3) It depends:
If your taxable position has a gain, don't sell as it'd be a short-term capital gain. Just fund the Roth using the new year's income.
If your taxable position has a loss, sell (tax-loss harvest) and use the proceeds to contribute to the Roth. Use income from the new year to top off the contribution as necessary. Use other income from the new year to buy shares in taxable.
Next year, repeat.
And if your taxable position has a loss, don't buy the same security in the Roth IRA within 31 days; if you do that, you will have a wash sale and be unable to deduct your loss. (This also applies to existing holdings within the Roth IRA; if you hold Total Stock Market Index in the Roth IRA and reinvest dividends, you will have a wash sale if you sell Total Stock Market Index for a loss within 30 days before or after the dividend reinvestment.)
Wiki David Grabiner

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by Cranberry44 » Wed May 20, 2020 12:03 pm

Thanks all! This has helped me create a plan and ease some anxiety.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by Cranberry44 » Wed May 20, 2020 5:34 pm

So sorry -- it turns out I have a more follow up question:

Context:
1) I have maxed my 2020 IRA contribution
2) I am now purchasing VTI in a taxable, with possibility of selling them to fund my 2021 Roth in 01/2021 (see below).
3a) If by the end of the year I can TLH, I will, and repurchase VTI in Roth after 31 days.
3b) If by the end of the the year my VTI taxable position has a gain, I won't touch it, and will fund the Roth with new income.

Question:
At step 2, should I be reinvesting dividends in this taxable account? Will that complicate 3a (or 3b) somehow?

*EDIT*
Shoot, I just realized that grabiner, two posts above, may have addressed this. Does his statement also apply to reinvesting the dividends in the taxable as well as the Roth? Sorry that I'm a bit confused -- the terminology and general investing practice is still new to me, but I sincerely appreciate the help and input.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by retired@50 » Wed May 20, 2020 5:45 pm

I'd just do step 3b regardless of the gain or loss. In other words, stop funding the Roth IRA in early January. Just fund it all year long.

Regards,
This is one person's opinion. Nothing more.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by Robert20 » Wed May 20, 2020 5:59 pm

Cranberry44 wrote:
Wed May 20, 2020 5:34 pm
So sorry -- it turns out I have a more follow up question:

Context:
1) I have maxed my 2020 IRA contribution
2) I am now purchasing VTI in a taxable, with possibility of selling them to fund my 2021 Roth in 01/2021 (see below).
3a) If by the end of the year I can TLH, I will, and repurchase VTI in Roth after 31 days.
3b) If by the end of the the year my VTI taxable position has a gain, I won't touch it, and will fund the Roth with new income.

Question:
At step 2, should I be reinvesting dividends in this taxable account? Will that complicate 3a (or 3b) somehow?

*EDIT*
Shoot, I just realized that grabiner, two posts above, may have addressed this. Does his statement also apply to reinvesting the dividends in the taxable as well as the Roth? Sorry that I'm a bit confused -- the terminology and general investing practice is still new to me, but I sincerely appreciate the help and input.
WHy do you want to sell ?.. why dont u just keep buying in ROTH in 2021 (upto 6K) then start funding VTI in taxable?

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by grabiner » Wed May 20, 2020 6:16 pm

Cranberry44 wrote:
Wed May 20, 2020 5:34 pm
Shoot, I just realized that grabiner, two posts above, may have addressed this. Does his statement also apply to reinvesting the dividends in the taxable as well as the Roth? Sorry that I'm a bit confused -- the terminology and general investing practice is still new to me, but I sincerely appreciate the help and input.
It helps to understand the basic definition of a wash sale. If you sell securities for a loss, and buy substantially identical replacement securities within 30 days before or after, you have a wash sale.

Automatically reinvested dividends are considered purchases, so they can create wash sales. However, if you sell the reinvested dividends, they cannot be replacement shares because they are no longer there. If you use your December 21 dividend to buy more shares, and then on January 6, you sell the shares you bought on December 21 (for a gain or loss) as well as some other shares for a loss, there is no wash sale.

If you sell shares for a loss on December 7, and then receive a dividend on December 21 which you reinvest in the same fund, this does create a wash sale. Wash sales are not illegal; they postpone the deduction of the capital loss until you sell the replacement shares. Thus, if you realize you have done this, and then sell the replacement shares, you get back your capital loss.

But if the replacement shares are in a Roth IRA, neither of these solutions work. You cannot sell specific shares in a Roth IRA, so if you have bought shares in the Roth IRA, you must wait 31 days before taking a capital loss (or sell your entire holding in the fund in the Roth IRA). And if you buy shares in the Roth IRA within 30 days of taking a capital loss, you permanently lose the deduction, since the capital loss is carried into an account in which capital losses are not deductible.
Wiki David Grabiner

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by mbasherp » Wed May 20, 2020 6:26 pm

Cranberry44 wrote:
Wed May 20, 2020 5:34 pm
3a) If by the end of the year I can TLH, I will, and repurchase VTI in Roth after 31 days.
You’re onto a good approach here, and I wanted to point out that this is, in my opinion, the best kind of TLH. Sell for a loss in taxable, move funds to Roth. Buy similar but not identical security. Change back with zero tax consequences after 31 days. This avoids a big drawback (sometimes) with TLH, where you’re lowering your cost basis and might pay Uncle Sam even bigger, later.

Your current approach is mine as well. Also, I’m not sure if you’ve mentioned your tax bracket, but in my case (0% capital gains tax) we can also realize gains with a tax gain harvest, moving money to Roth every year, subject to the 0% CG bracket limits as well.

Managing these things well pays its own dividend!

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by tashnewbie » Wed May 20, 2020 6:40 pm

Wouldn’t it just be easiest to switch to funding Roth in 2021 until maxed, and then switch to adding to taxable? This seems like the easiest way to do this versus selling in taxable etc.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by MrJedi » Wed May 20, 2020 7:08 pm

Each year i just start sweeping excess cash toward Roth IRA until maxed. After that is maxed then the extra cash goes toward mega backdoor Roth 401k or taxable. Then after the new year I go back to Roth IRA, etc. This way money earmarked for investment goes in as soon as it's available. I don't try to sell in taxable to front load the Roth IRA as quickly as possible unless there happens to be a TLH opportunity that coincides with that...that just makes things more complicated than necessary IMO.

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by Cranberry44 » Mon May 25, 2020 6:56 pm

tashnewbie wrote:
Wed May 20, 2020 6:40 pm
Wouldn’t it just be easiest to switch to funding Roth in 2021 until maxed, and then switch to adding to taxable? This seems like the easiest way to do this versus selling in taxable etc.
So I take this to mean that you aren't concerned with ever tax loss harvesting?

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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by RomeoMustDie » Mon May 25, 2020 7:09 pm

Put money into healthcare savings and education savings accounts until roth becomes available again. Maybe up your 401k contribution when you know your roth is full.

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cchrissyy
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Re: Best place to gradually save $6000 to max-out Roth IRA contribution in January

Post by cchrissyy » Mon May 25, 2020 7:11 pm

investing with a taxable account does not have to be this complicated.
i think it's good to learn what tax loss and tax gain harvesting are. and how taxes work in brokerage accounts in general.
but you do not have to do tax loss harvesting. it's optional.

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