Optimal way to fund IRA?

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nptit
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Joined: Sun Mar 29, 2015 5:51 pm

Optimal way to fund IRA?

Post by nptit »

What is the optimal way to fund ones IRA? The way I see it my options are:
(Note I making the assumption that all accounts are funded and I have room for after tax investing)
* Start diverting money away from taxable investing in say August of each year into a money market fund/cash, so that you can max out the IRA in January.
* Invest in taxable accounts like normal, but in January begin contributing all extra money to the IRA till you max it out in March/April?
DSInvestor
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Re: Optimal way to fund IRA?

Post by DSInvestor »

Whatever works for you to max out all tax advantaged accounts. If using backdoor into Roth IRA, I'd make one contribution for a given tax year rather than multiple. One contribution and one conversion to keep things simple.

Roth IRA contribution MAGI limits makes it a little tricky your income is close to going over the limits. In this case, you may want to hold off on Roth IRA contributions until after you have your tax return prepared so you'll know exactly where you stand before you contribute. If you know you're going to be over the MAGI limit and can use the backdoor into Roth IRA, you can simply contribute the whole $5500/6500 to Traditional IRA for 2016 in January 2016 and immediately convert to Roth IRA, then contribute to taxable accounts.
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Toons
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Re: Optimal way to fund IRA?

Post by Toons »

When I was contributing to an IRA ,the most optimal forme was to fully fund it the first trading day of the New Year if I could.
Otherwise I would fund it as quickly as possible moving through the year.
Time,not timing. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Geologist
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Re: Optimal way to fund IRA?

Post by Geologist »

When you have the money. Since it appears you can arrange to have the money at the beginning of the year, then, as others have already said, as early in the year as practical. Other people may only get the money with each paycheck, so may have to make other plans.
Topic Author
nptit
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Re: Optimal way to fund IRA?

Post by nptit »

Thanks for the input.

The notion "if I could fund it the first day of the year I would" is still not clear.
You can then make the point that you should not just have money sitting on the sidelines accumulating cash for ~3 month before January. During the ~3 months before January I would be investing in a taxable account following my desired asset allocation and thus would have the money have "more time in the market".
DSInvestor
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Re: Optimal way to fund IRA?

Post by DSInvestor »

nptit wrote:Thanks for the input.

The notion "if I could fund it the first day of the year I would" is still not clear.
You can then make the point that you should not just have money sitting on the sidelines accumulating cash for ~3 month before January. During the ~3 months before January I would be investing in a taxable account following my desired asset allocation and thus would have the money have "more time in the market".
If you have sufficient cash to fully fund in January 2016 to fund IRA contributions, do so. It doesn't necessarily mean you have cash waiting uninvested. It could be that you fund IRA for 5.5K in January and then fund taxable for 5K/month for FEB-DEC. Some folks choose not to reinvest dividends in their taxable holdings and depending on the size of their taxable holdings, their dividends from late Dec could fund or help fund their JAN IRA contributions.

Do you have an emergency cash reserve? I imagine you do given your ability to max out retirement accounts and invest in taxable accounts. Say you have 3-6 month cash reserve of 15-30K, use 5.5K of that to fund IRA in January and then replenish afterwards.

There are ways to front-load your IRA contributions without have to "save up" for those contributions.
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Geologist
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Re: Optimal way to fund IRA?

Post by Geologist »

I'm more interested in getting cash promptly into tax-deferred space than having it in the market all the time. It is easy for me to say this, however. I just take the annual contribution from the cash portion of my emergency fund and then rebuild that over the course of the year.
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nptit
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Re: Optimal way to fund IRA?

Post by nptit »

Thanks. I get the the drift of what you are saying now.
I do not have emergency cash reserves. I am in my 20's in a strong industry/job market. I have chosen at this point in my life to have more of an aggressive approach while keeping ~6 months reserve in a total bond fund.
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