DCA or one-timer into backdoor Roth TD?

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familythriftmd
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DCA or one-timer into backdoor Roth TD?

Post by familythriftmd »

I plan to do a TIRA to Roth conversion sometime in the January/February timeframe for me and then again for the wife maybe in early summer or so, just so I'm not draining the ER and I can cash flow that back up. A variation on the theme here with respect to DCA vs. one-time/bolus investing, but would you recommend that once that conversion is consummated that I DCA from the settlement to the target date of choice throughout the year (say, 6k/x number of weeks or months left), or would you just put it in once into a target date fund and forget about it?

Thanks
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Re: DCA or one-timer into backdoor Roth TD?

Post by livesoft »

Generally, a backdoor Roth IRA is about $6K to $7K because it comes from a max contribution to a non-deductible tIRA, then a complete conversion. I think for that amount of money it is totally ridiculous to DCA, so just lump sump into your investment which seems to be a target date fund.
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Re: DCA or one-timer into backdoor Roth TD?

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Thanks for the input! Since it is a 30-40 year time horizon for me, DCA in one year does seem a little ridiculous, now that I think about it.
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Re: DCA or one-timer into backdoor Roth TD?

Post by Boatguy »

Keep in mind that you can use the Roth as an emergency fun (contributions can be withdrawn at any time without penalty), so if you have a burning desire to fund both accounts at the beginning of the year, you could consider that. I suppose the downside is that if you really needed that cash before your emergency fund is rebuilt, then you’ve exhausted your Roth contribution for the year.
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Re: DCA or one-timer into backdoor Roth TD?

Post by grabiner »

Whether you DCA or not, you should fund the Roth IRA all at once if you have the money. You can leave the money in bonds and move it into stock during the year if you prefer to DCA, but while it is in bonds, you would prefer the bonds to grow tax-free.

I do agree that a voluntary DCA of $6000 isn't worth doing, except possibly if it is your very first investment. If you have a $54K portfolio already, then adding $6K to an IRA is only increasing your stock allocation by 10% if it all goes into a stock fund, which is a common rate of increasing stock allocation when you DCA.
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Re: DCA or one-timer into backdoor Roth TD?

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familythriftmd wrote: Thu Oct 15, 2020 6:50 pm Thanks for the input! Since it is a 30-40 year time horizon for me, DCA in one year does seem a little ridiculous, now that I think about it.
DCA is always ridiculous when you really think about it. Take these two situations:

Bob is given $1M in an inherited IRA all in cash, all at once.

Jeff has $1M in a 401k which he has achieved by prudently saving and investing over 30 years, let's say 90% of it is gains.

Many people would say it makes sense for Bob to DCA. What do you think people would say if Jeff wanted to move the full $1M to money market (no taxes in 401k) and then re-DCA it into the same allocation? They would say that makes no sense. What if Jeff wanted to do that year after year, so he gets fully invested, moves to cash, DCA's back to full investment, and repeats forever. CRAZY.

Now step back and ask yourself, what is different about Bob's $1M and Jeff's? Nothing.

DCA is an emotional crutch. Some people need an emotional crutch to help them invest which is fine, but in reality, there is no logic behind DCA beyond that emotional aspect.

If I get $1M tomorrow morning it'll be invested ASAP. My asset allocation may change if it changes my need, willingness, or ability to take risk, but I will not wait any longer than it takes to make that decision.
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Re: DCA or one-timer into backdoor Roth TD?

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MotoTrojan wrote: Fri Oct 16, 2020 4:49 pm
familythriftmd wrote: Thu Oct 15, 2020 6:50 pm Thanks for the input! Since it is a 30-40 year time horizon for me, DCA in one year does seem a little ridiculous, now that I think about it.
DCA is always ridiculous when you really think about it. Take these two situations:

Bob is given $1M in an inherited IRA all in cash, all at once.

Jeff has $1M in a 401k which he has achieved by prudently saving and investing over 30 years, let's say 90% of it is gains.

Many people would say it makes sense for Bob to DCA. What do you think people would say if Jeff wanted to move the full $1M to money market (no taxes in 401k) and then re-DCA it into the same allocation? They would say that makes no sense. What if Jeff wanted to do that year after year, so he gets fully invested, moves to cash, DCA's back to full investment, and repeats forever. CRAZY.

Now step back and ask yourself, what is different about Bob's $1M and Jeff's? Nothing.

DCA is an emotional crutch. Some people need an emotional crutch to help them invest which is fine, but in reality, there is no logic behind DCA beyond that emotional aspect.

If I get $1M tomorrow morning it'll be invested ASAP. My asset allocation may change if it changes my need, willingness, or ability to take risk, but I will not wait any longer than it takes to make that decision.
I understand your reasoning and I like your examples, although I would say that DCA has its value if your cashflowing your paychecks into the markets as you get paid from work. I don't see how else you would do it. Unless you call that something else.
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Re: DCA or one-timer into backdoor Roth TD?

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familythriftmd wrote: Mon Oct 05, 2020 8:34 am I plan to do a TIRA to Roth conversion sometime in the January/February timeframe for me and then again for the wife maybe in early summer...
When doing a Backdoor Roth, I assume you are aware that the TIRA should be empty at the end of the year of any conversion, so you can avoid the pro rata rule.

It is also easier to conceptualize everything if you make the non-deductible contribution and do the conversion in the same year (the year for which the contribution applies). For example, you could make a contribution ***FOR*** 2020 up till April 15, 2021, then convert it ***IN*** 2023. That would require the non-deductible contribution (basis) to be reported on your 2020 taxes and the conversion on your 2023 taxes. In this case, it will be easier to understand if you make your 2020 contribution in 2020 and convert in 2020.
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Re: DCA or one-timer into backdoor Roth TD?

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celia wrote: Fri Oct 16, 2020 10:42 pm
familythriftmd wrote: Mon Oct 05, 2020 8:34 am I plan to do a TIRA to Roth conversion sometime in the January/February timeframe for me and then again for the wife maybe in early summer...
When doing a Backdoor Roth, I assume you are aware that the TIRA should be empty at the end of the year of any conversion, so you can avoid the pro rata rule.

It is also easier to conceptualize everything if you make the non-deductible contribution and do the conversion in the same year (the year for which the contribution applies). For example, you could make a contribution ***FOR*** 2020 up till April 15, 2021, then convert it ***IN*** 2023. That would require the non-deductible contribution (basis) to be reported on your 2020 taxes and the conversion on your 2023 taxes. In this case, it will be easier to understand if you make your 2020 contribution in 2020 and convert in 2020.
Thanks for reminding me about the wiki page! For some reason I forgot to look for that earlier.
I do know about the pro rata rule, but sometimes I get confused about what exactly it means.
Thanks for the example about the conversions; I didn't know you could separate them temporally like that.

However, I would think it would be a lot easier and less likely to cause trouble if I moved over the funds immediately after the money hits the settlement fund in the TIRA, right?
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Re: DCA or one-timer into backdoor Roth TD?

Post by MotoTrojan »

familythriftmd wrote: Fri Oct 16, 2020 5:06 pm
MotoTrojan wrote: Fri Oct 16, 2020 4:49 pm
familythriftmd wrote: Thu Oct 15, 2020 6:50 pm Thanks for the input! Since it is a 30-40 year time horizon for me, DCA in one year does seem a little ridiculous, now that I think about it.
DCA is always ridiculous when you really think about it. [snip]
I understand your reasoning and I like your examples, although I would say that DCA has its value if your cashflowing your paychecks into the markets as you get paid from work. I don't see how else you would do it. Unless you call that something else.
I call that lump-sum investing excess-cash as soon as it becomes available; Prudent and logical way to do it.
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Re: DCA or one-timer into backdoor Roth TD?

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familythriftmd wrote: Sat Oct 17, 2020 6:13 am However, I would think it would be a lot easier and less likely to cause trouble if I moved over the funds immediately after the money hits the settlement fund in the TIRA, right?
Certainly. You can convert the day after the contribution is made, although there might be a time delay if the settlement fund needs to "settle" after a sale in taxable (as an example).

But I got the impression you first need to clear out your tIRA(s) although you can leave a small amount in there and convert it along with the new non-deductible contribution. It's all about how much you want to pay in Roth conversion taxes. When you convert the TIRA balance, the amount of the non-deductible contribution will be tax-free but the rest of the conversion will be taxed like ordinary income.

The pro rata rule just means that since the IRS sees all your tax-deferred IRAs as one big IRA, when you make a non-deductible contribution, the IRS sees that as a percentage of your total IRAs, even though you might have put the contribution into a "new" account. Because everything really is one big IRA (even when held at various custodians), when you convert that tiny IRA which is x% of your total IRAs, you are really converting x% of your total IRAs. In that case, some of the conversion is tax-free and some of it is taxed. The amount remaining in the total IRAs after the conversion is then also partly tax-free and partly needs to be taxed in the future. This mix of tax-free and pre-tax hangs around until the IRAs are all emptied (or until you forget one year and start treating all your IRAs to be completely tax-deferred).
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Re: DCA or one-timer into backdoor Roth TD?

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celia wrote: Sat Oct 17, 2020 9:48 pm
familythriftmd wrote: Sat Oct 17, 2020 6:13 am However, I would think it would be a lot easier and less likely to cause trouble if I moved over the funds immediately after the money hits the settlement fund in the TIRA, right?
Certainly. You can convert the day after the contribution is made, although there might be a time delay if the settlement fund needs to "settle" after a sale in taxable (as an example).

But I got the impression you first need to clear out your tIRA(s) although you can leave a small amount in there and convert it along with the new non-deductible contribution. It's all about how much you want to pay in Roth conversion taxes. When you convert the TIRA balance, the amount of the non-deductible contribution will be tax-free but the rest of the conversion will be taxed like ordinary income.

The pro rata rule just means that since the IRS sees all your tax-deferred IRAs as one big IRA, when you make a non-deductible contribution, the IRS sees that as a percentage of your total IRAs, even though you might have put the contribution into a "new" account. Because everything really is one big IRA (even when held at various custodians), when you convert that tiny IRA which is x% of your total IRAs, you are really converting x% of your total IRAs. In that case, some of the conversion is tax-free and some of it is taxed. The amount remaining in the total IRAs after the conversion is then also partly tax-free and partly needs to be taxed in the future. This mix of tax-free and pre-tax hangs around until the IRAs are all emptied (or until you forget one year and start treating all your IRAs to be completely tax-deferred).
Thanks! My eyes glazed over a little bit, but I think I just need to read some more good books about the tax code to gain some facility with this stuff.

No, I don't have money in the tIRA currently. I did a direct Roth this year. My only tax-deferred is 403(b) right now. Just planning to do a backdoor next year when I anticipate that I will no longer eligible for the direct Roth IRA.
You can check out my IPS in the IPS thread if you feel so inclined, but long story short my deferred accounts are and will be 403(b) and non-governmental 457(b) in a good organization with good options, and my post-tax will is the sum of Roth and spousal Roth IRA accounts and next year will be backdoor Roth IRA accounts. The rest is taxable, which I have just recently started, as well as early mortgage pay-off.

So to sum up everything, my plan this coming year will be to put in 6k or whatever the new amount is into the tIRA, then convert after the settlement account gets set up and put that into my existing Roth IRA account. I will do the same with my wife, although I will probably need to do those at different times to bring the EF/capacitance fund back up to 6 months in between contributions. I haven't picked the months quite yet.
So the answer for me now to the question of the thread title is: lump sum, not DCA.
I will still "DCA" or cash-flow a proportion of my pay checks into the taxable account a la Automatic Millionaire.
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Re: DCA or one-timer into backdoor Roth TD?

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familythriftmd wrote: Sun Oct 18, 2020 7:29 am Thanks! My eyes glazed over a little bit, but I think I just need to read some more good books about the tax code to gain some facility with this stuff.
Part of this is probably my fault as I assumed you were a doctor (very high wage-earner) with large accounts because your screen name ended in "md". But maybe you live in Maryland??? or those are your initials??? or ???. You don't need to address that; it is just to explain my mindset while responding.

You can learn a lot just by reading this forum. Some of this will become more familiar to you as you read about similar scenarios over time.
... the sum of Roth and spousal Roth IRA accounts and next year will be backdoor Roth IRA accounts.
As a clarification of some terminology, there is no account known as a "spousal Roth IRA". It is just a "Roth IRA" or simply a "Roth" (and the account is assumed to be an IRA unless one specifies a "Roth 401K"). The "spousal" part is just explaining how one is able to contribute if they don't have earned income themself. Once the money is in the account, it is still just known as a "Roth IRA".

There is also no account known as a "Backdoor Roth IRA". Again, this just refers to how the contributions were made. It is a process or 2-step "technique" for getting money into a Roth IRA when your income is high. In this case, the non-deductible contribution first took a detour through a Traditional IRA. If you haven't read the Backdoor Roth wiki page, I suggest you start there.
So to sum up everything, my plan this coming year will be to put in 6k or whatever the new amount is into the tIRA, then convert after the settlement account gets set up and put that into my existing Roth IRA account. I will do the same with my wife, although I will probably need to do those at different times to bring the EF/capacitance fund back up to 6 months in between contributions. I haven't picked the months quite yet.
So the answer for me now to the question of the thread title is: lump sum, not DCA.
I will still "DCA" or cash-flow a proportion of my pay checks into the taxable account a la Automatic Millionaire.
Sounds good!
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Re: DCA or one-timer into backdoor Roth TD?

Post by familythriftmd »

celia wrote: Mon Oct 19, 2020 1:46 am ...
I'm a doctor, but you probably already have heard that doctors are dumb with money, especially those who are W-2. I'm working on it, though!

I do know that there is no account called backdoor Roth, but that it's a process.

Thanks for your help.
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Re: DCA or one-timer into backdoor Roth TD?

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familythriftmd wrote: Mon Oct 19, 2020 7:09 am I'm a doctor, but you probably already have heard that doctors are dumb with money, especially those who are W-2. I'm working on it, though!
But you guys/gals have more important things than investments to think about each working day.

You would probably also like the White Coat Investor website which is managed by one of our Bogleheads members. He doesn't post very much on here since he is frequently adding to his own website. It is also heavy on ads although there is good content there.
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Re: DCA or one-timer into backdoor Roth TD?

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celia wrote: Mon Oct 19, 2020 3:13 pm
familythriftmd wrote: Mon Oct 19, 2020 7:09 am I'm a doctor, but you probably already have heard that doctors are dumb with money, especially those who are W-2. I'm working on it, though!
But you guys/gals have more important things than investments to think about each working day.

You would probably also like the White Coat Investor website which is managed by one of our Bogleheads members. He doesn't post very much on here since he is frequently adding to his own website. It is also heavy on ads although there is good content there.
Yes, Dr. Dahle was the one to point me to this community. Thanks!
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