Am I missing out on Roth IRA

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sedonabogle
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Am I missing out on Roth IRA

Post by sedonabogle » Thu Jan 31, 2019 2:17 pm

I've been following the principles and have a pretty good grasp on my personal investments and savings. I'm 30 and not married, 3 years into a 15 year mortgage. No debt. I have over $100k in my work's savings plan and maxing that out. I have a sizable CD and a small traditional IRA that I'm planning on moving into my work's savings plan to simplify things. I also auto invest $1k each month into 3 fidelity funds. Once out of college my first priority was tax savings so that's why I started the traditional IRA. I thought the idea of Roth sounded silly at the time. But now that I have a comfortable savings built up, both 401k, cash/CD, and stocks, I'm wondering should I be maxing out a Roth IRA. So $500 to stocks a month and $500 to Roth IRA. What do you think? That is possible max that ($6k) and savings ($18.5k), right? Looking to retire between 55 and 60. Thanks for any and all advice! Looking forward to hearing your opinions. I'm glad I found this forum a few years ago to put me on the right path. Now looking to better position and educate myself.

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Earl Lemongrab
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Re: Am I missing out on Roth IRA

Post by Earl Lemongrab » Thu Jan 31, 2019 5:15 pm

It doesn't make much sense to do taxable investing before maxing out a Roth IRA. In fact, you still have time to do 2018. I would direct all new money into a 2018 Roth until that is maxed or you hit the deadline (4/15/2019 this year). After that, concentrate on your Roth for 2019. Don't split, the sooner you get money into Roth the better.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

lakpr
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Re: Am I missing out on Roth IRA

Post by lakpr » Thu Jan 31, 2019 5:39 pm

With taxable investments, you are paying ordinary income taxes on dividends, and at least a 15% tax on the capital gains when you sell. With Roth IRA, both would be tax free, and the contributions to it, not the gains, can be withdrawn (but not put back in later) in case of an emergency. This Roth space is lost forever if not taken advantage of. You must take full advantage of it before you can even think about taxable investing.

Thecallofduty
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Re: Am I missing out on Roth IRA

Post by Thecallofduty » Thu Jan 31, 2019 5:47 pm

What is your income? Are you a very high earner? if so keep in mind you may need to do a backdoor roth conversion. If your modified adjust gross income in 2018 was less than 135k i believe then you can contrubite directly to roth ira for that tax year.
-thecallofduty

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sedonabogle
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Re: Am I missing out on Roth IRA

Post by sedonabogle » Thu Jan 31, 2019 8:07 pm

Earl Lemongrab wrote:
Thu Jan 31, 2019 5:15 pm
It doesn't make much sense to do taxable investing before maxing out a Roth IRA. In fact, you still have time to do 2018. I would direct all new money into a 2018 Roth until that is maxed or you hit the deadline (4/15/2019 this year). After that, concentrate on your Roth for 2019. Don't split, the sooner you get money into Roth the better.
Roger that. Can I transfer $5500 from current Fidelity investments (non retirement) into a 2018 Roth there at once? Or not allowed or reasons against that?

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sedonabogle
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Re: Am I missing out on Roth IRA

Post by sedonabogle » Thu Jan 31, 2019 8:08 pm

lakpr wrote:
Thu Jan 31, 2019 5:39 pm
With taxable investments, you are paying ordinary income taxes on dividends, and at least a 15% tax on the capital gains when you sell. With Roth IRA, both would be tax free, and the contributions to it, not the gains, can be withdrawn (but not put back in later) in case of an emergency. This Roth space is lost forever if not taken advantage of. You must take full advantage of it before you can even think about taxable investing.
Understood. I was just happy doing a 3 fund monthly investment but forgot about Roth. Makes sense, I am getting hit on those capital gains. Thanks

Topic Author
sedonabogle
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Re: Am I missing out on Roth IRA

Post by sedonabogle » Thu Jan 31, 2019 8:10 pm

Thecallofduty wrote:
Thu Jan 31, 2019 5:47 pm
What is your income? Are you a very high earner? if so keep in mind you may need to do a backdoor roth conversion. If your modified adjust gross income in 2018 was less than 135k i believe then you can contrubite directly to roth ira for that tax year.

Around $110k/year. Employer puts 6% in retirement. I max out HSA.

lakpr
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Re: Am I missing out on Roth IRA

Post by lakpr » Thu Jan 31, 2019 8:26 pm

sedonabogle wrote:
Thu Jan 31, 2019 8:07 pm
Earl Lemongrab wrote:
Thu Jan 31, 2019 5:15 pm
It doesn't make much sense to do taxable investing before maxing out a Roth IRA. In fact, you still have time to do 2018. I would direct all new money into a 2018 Roth until that is maxed or you hit the deadline (4/15/2019 this year). After that, concentrate on your Roth for 2019. Don't split, the sooner you get money into Roth the better.
Roger that. Can I transfer $5500 from current Fidelity investments (non retirement) into a 2018 Roth there at once? Or not allowed or reasons against that?
Yes you can do that, but be aware that your current taxable investment would be liquidated, and you would incur taxes on cap gains, if any. Contributions to Roth (or traditional, for that matter), can only be made in cash, not securities of any kind. So if you indicate to Fidelity that your current taxable account as the source of funds, they will be liquidated.

Elena
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Re: Am I missing out on Roth IRA

Post by Elena » Thu Jan 31, 2019 8:33 pm

I love my Roth acct. You could invest $5500 for 2018 and $6000 for 2019 at once, then let it do its thing. It is my favorite account, though I cannot tell whether it is "taxable" or not, LOL. Like Schrodinger's cat. You have already paid the taxes, so it is not taxable, yet it is not tax deferred either.

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David Jay
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Re: Am I missing out on Roth IRA

Post by David Jay » Thu Jan 31, 2019 8:41 pm

And you can do a Roth contribution for each of you, so you can put in $11,000 (5500 * 2) for 2018 and $12,000 for 2019.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

cherijoh
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Re: Am I missing out on Roth IRA

Post by cherijoh » Thu Jan 31, 2019 8:46 pm

lakpr wrote:
Thu Jan 31, 2019 8:26 pm
sedonabogle wrote:
Thu Jan 31, 2019 8:07 pm
Earl Lemongrab wrote:
Thu Jan 31, 2019 5:15 pm
It doesn't make much sense to do taxable investing before maxing out a Roth IRA. In fact, you still have time to do 2018. I would direct all new money into a 2018 Roth until that is maxed or you hit the deadline (4/15/2019 this year). After that, concentrate on your Roth for 2019. Don't split, the sooner you get money into Roth the better.
Roger that. Can I transfer $5500 from current Fidelity investments (non retirement) into a 2018 Roth there at once? Or not allowed or reasons against that?
Yes you can do that, but be aware that your current taxable investment would be liquidated, and you would incur taxes on cap gains, if any. Contributions to Roth (or traditional, for that matter), can only be made in cash, not securities of any kind. So if you indicate to Fidelity that your current taxable account as the source of funds, they will be liquidated.
OP - if you haven't sold any of your taxable funds previously, you can specify that you want to use specific ID as a cost basis. (If you have previously sold shares and used average cost basis, you are stuck with that going forward). In light of the poor returns in 2018, you could probably sell lots that don't have huge capital gains. While it isn't a good idea to generate short term capital gains (i.e., subject to ordinary income tax rates), short term capital losses are ok. You could also sell a mixture of losses and gains to net out to zero.

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arcticpineapplecorp.
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Re: Am I missing out on Roth IRA

Post by arcticpineapplecorp. » Thu Jan 31, 2019 9:27 pm

Elena wrote:
Thu Jan 31, 2019 8:33 pm
I love my Roth acct. You could invest $5500 for 2018 and $6000 for 2019 at once, then let it do its thing. It is my favorite account, though I cannot tell whether it is "taxable" or not, LOL. Like Schrodinger's cat. You have already paid the taxes, so it is not taxable, yet it is not tax deferred either.
It is not taxable (as in anything earned being taxable) nor is it tax-deferred (because you paid the taxes, you are not deferring the taxes til later), therefore you can either refer to it as a post-tax account (as in you already paid the tax so never again) or tax-free account (because everything that grows is not subject to tax, nor any tax when withdrawn).

There are some minor caveats of course, like if you take out the earnings (not contributions) before 59 1/2 and prior to having the Roth for 5 years (unless an exemption applies). But this is referred to as the 10% penalty (on withdrawal of earnings/not contributions) but some would call it a tax penalty of 10%.

The Roth is a secondary emergency savings account (sort of) in that you can take out your contributions at any time, for any reason without taxes or penalty. So there are good reasons to like it.

You can also pass it to heirs tax free, though they will have to make RMDs according to their life expectancy. Still, imagine investing $6000 starting at age 25 and continuing through 65, earning 8% per year for 40 years. It'd be $1,554,339.11. Then imagine not contributing anymore but living until 95 and getting another 8% per year because it's for inheritance, not current spending). It would grow to $15,640,781.15. Then imagine leaving that to your grandchild (or great grandchild) to take RMDs over his/her lifetime. Wowza.

(you can assume lower returns if you wish. you can start before 22 or continue working past 65 and this example doesn't account for increases in Roth contributions nor 50+ extra $1000 per year. Run whatever numbers you want, but the Roth is definitely a great account for these reasons).
"Invest we must" | "By God, If John Q. Public doesn't get the word after two Swedroe books, two (Bill) Bernstein books, and four Bogle books, he (she) has only himself to blame!"

Topic Author
sedonabogle
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Re: Am I missing out on Roth IRA

Post by sedonabogle » Thu Jan 31, 2019 9:29 pm

cherijoh wrote:
Thu Jan 31, 2019 8:46 pm
lakpr wrote:
Thu Jan 31, 2019 8:26 pm
sedonabogle wrote:
Thu Jan 31, 2019 8:07 pm
Earl Lemongrab wrote:
Thu Jan 31, 2019 5:15 pm
It doesn't make much sense to do taxable investing before maxing out a Roth IRA. In fact, you still have time to do 2018. I would direct all new money into a 2018 Roth until that is maxed or you hit the deadline (4/15/2019 this year). After that, concentrate on your Roth for 2019. Don't split, the sooner you get money into Roth the better.
Roger that. Can I transfer $5500 from current Fidelity investments (non retirement) into a 2018 Roth there at once? Or not allowed or reasons against that?
Yes you can do that, but be aware that your current taxable investment would be liquidated, and you would incur taxes on cap gains, if any. Contributions to Roth (or traditional, for that matter), can only be made in cash, not securities of any kind. So if you indicate to Fidelity that your current taxable account as the source of funds, they will be liquidated.
OP - if you haven't sold any of your taxable funds previously, you can specify that you want to use specific ID as a cost basis. (If you have previously sold shares and used average cost basis, you are stuck with that going forward). In light of the poor returns in 2018, you could probably sell lots that don't have huge capital gains. While it isn't a good idea to generate short term capital gains (i.e., subject to ordinary income tax rates), short term capital losses are ok. You could also sell a mixture of losses and gains to net out to zero.
My current automatic investments are allocations to:
FOSFX - 20% ($200)
FSKAX - 55% ($550)
FTBFX - 25% ($250)

So one easy option would be to direct $3000 to Roth 2018 targeting Feb-April (prior to 4/15) transactions ($1k/month). For the remainder of the year allocate $6000 more, then continue maxing for years to come.

Or better to get some short term capital losses and going that route? If so, looks like I need to get educated on converting to basis? I'm leaning toward the first option for simplicity but am I missing a lot by avoiding this one?

For Roth, should I go with the new zero funds? I remember seeing these and looked like it's best to stay my current course for my taxable account, although in my mind I would like to be all on zero expense ratio. Or should I be doing new investments (taxable and Roth) to the zero funds?

Opinions on my allocation %'s are also welcome.

Appreciate the help. While I enjoyed the thrill of day trading years ago, the 3-fund philosophy and automatic/monthly investments I've learned from here have taken away a ton of stress and put me in a better financial position. Looking forward to making some adjustments now and getting on an even better track.

Edit to add: Is my plan to transfer my Fidelity Traditional IRA to my workplace 401k reasonable? I'm in SSFEX (25%), SVSPX (55%), DPWRX (10%), and RERGX (10%) at workplace. Traditional IRA is same as above. I max out 401k and haven't added to the IRA for years so I'd like to combine to simplify things. Or should I just keep my hands off that one?

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Earl Lemongrab
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Re: Am I missing out on Roth IRA

Post by Earl Lemongrab » Fri Feb 01, 2019 12:35 am

lakpr wrote:
Thu Jan 31, 2019 5:39 pm
With taxable investments, you are paying ordinary income taxes on dividends, and at least a 15% tax on the capital gains when you sell.
Most stock index funds, especially US ones, will have the majority of the dividends qualified. They will have the same tax treatment as long-term capital gains, not ordinary income.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

limeyx
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Re: Am I missing out on Roth IRA

Post by limeyx » Tue Feb 05, 2019 2:58 pm

David Jay wrote:
Thu Jan 31, 2019 8:41 pm
And you can do a Roth contribution for each of you, so you can put in $11,000 (5500 * 2) for 2018 and $12,000 for 2019.
Just did exactly this at the beginning of Jan

Topic Author
sedonabogle
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Re: Am I missing out on Roth IRA

Post by sedonabogle » Wed Feb 06, 2019 3:24 pm

limeyx wrote:
Tue Feb 05, 2019 2:58 pm
David Jay wrote:
Thu Jan 31, 2019 8:41 pm
And you can do a Roth contribution for each of you, so you can put in $11,000 (5500 * 2) for 2018 and $12,000 for 2019.
Just did exactly this at the beginning of Jan
Did you do this with new funds or selling from existing taxed account?

I'm on the fence about which option to go - I'm leaning toward funding via new money vs. deciding what to sell from my existing account to avoid or minimize taxes.

carmonkie
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Re: Am I missing out on Roth IRA

Post by carmonkie » Wed Feb 06, 2019 5:35 pm

sedonabogle wrote:
Wed Feb 06, 2019 3:24 pm
limeyx wrote:
Tue Feb 05, 2019 2:58 pm
David Jay wrote:
Thu Jan 31, 2019 8:41 pm
And you can do a Roth contribution for each of you, so you can put in $11,000 (5500 * 2) for 2018 and $12,000 for 2019.
Just did exactly this at the beginning of Jan
Did you do this with new funds or selling from existing taxed account?

I'm on the fence about which option to go - I'm leaning toward funding via new money vs. deciding what to sell from my existing account to avoid or minimize taxes.
I am funding 2019 with new money, but on your taxable you could Tax Loss Harvest and move that money to your Roth, then on your Roth buy a replacement fund.
I would not sell anything that would incur a tax bill.

Ben Mathew
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Re: Am I missing out on Roth IRA

Post by Ben Mathew » Wed Feb 06, 2019 5:45 pm

Don't do taxable investing before you have maximized all available tax-advantaged accounts. Traditional and Roth IRA will both be better than taxable. Between traditional or Roth IRA, it depends your marginal tax rates now vs marginal tax rate when you withdraw. See wiki article Traditional versus Roth for more information.

Topic Author
sedonabogle
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Re: Am I missing out on Roth IRA

Post by sedonabogle » Fri Feb 08, 2019 2:58 pm

Thanks for the advice!

fujiters
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Re: Am I missing out on Roth IRA

Post by fujiters » Sat Feb 09, 2019 12:59 am

carmonkie wrote:
Wed Feb 06, 2019 5:35 pm
sedonabogle wrote:
Wed Feb 06, 2019 3:24 pm
limeyx wrote:
Tue Feb 05, 2019 2:58 pm
David Jay wrote:
Thu Jan 31, 2019 8:41 pm
And you can do a Roth contribution for each of you, so you can put in $11,000 (5500 * 2) for 2018 and $12,000 for 2019.
Just did exactly this at the beginning of Jan
Did you do this with new funds or selling from existing taxed account?

I'm on the fence about which option to go - I'm leaning toward funding via new money vs. deciding what to sell from my existing account to avoid or minimize taxes.
I am funding 2019 with new money, but on your taxable you could Tax Loss Harvest and move that money to your Roth, then on your Roth buy a replacement fund.
I would not sell anything that would incur a tax bill.
But note that if you've been buying monthly throughout 2018, you probably have some losses. Sell anything that has a loss and use that to fund Roth. You get up to $3k/ year of losses to claim against your income, which lowers your tax bill. Then you get to avoid paying taxes on ongoing dividends and capital gains within the Roth.

Note: don't buy the same funds you take a loss on within 30 days (including before you sell), or you will have a wash sale. It's especially important not to rebuy the same funds in your Roth account you've just taken a loss on because then your can't correct it (because the new modified basis is on your Roth shares, and there is no value in realizing a loss in a Roth account).

Generally, if you're going to sell at a loss, you probably want to do some reading on "tax loss harvesting" to ensure you're knowledgeable about what you're doing.
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham

mortfree
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Re: Am I missing out on Roth IRA

Post by mortfree » Sat Feb 09, 2019 2:14 am

Did you contribute to the traditional IRA in 2018?

If so, you can’t do the Roth for 2018, unless you didn’t max out the traditional.

Topic Author
sedonabogle
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Re: Am I missing out on Roth IRA

Post by sedonabogle » Mon Feb 11, 2019 9:41 am

fujiters wrote:
Sat Feb 09, 2019 12:59 am
carmonkie wrote:
Wed Feb 06, 2019 5:35 pm
sedonabogle wrote:
Wed Feb 06, 2019 3:24 pm
limeyx wrote:
Tue Feb 05, 2019 2:58 pm
David Jay wrote:
Thu Jan 31, 2019 8:41 pm
And you can do a Roth contribution for each of you, so you can put in $11,000 (5500 * 2) for 2018 and $12,000 for 2019.
Just did exactly this at the beginning of Jan
Did you do this with new funds or selling from existing taxed account?

I'm on the fence about which option to go - I'm leaning toward funding via new money vs. deciding what to sell from my existing account to avoid or minimize taxes.
I am funding 2019 with new money, but on your taxable you could Tax Loss Harvest and move that money to your Roth, then on your Roth buy a replacement fund.
I would not sell anything that would incur a tax bill.
But note that if you've been buying monthly throughout 2018, you probably have some losses. Sell anything that has a loss and use that to fund Roth. You get up to $3k/ year of losses to claim against your income, which lowers your tax bill. Then you get to avoid paying taxes on ongoing dividends and capital gains within the Roth.

Note: don't buy the same funds you take a loss on within 30 days (including before you sell), or you will have a wash sale. It's especially important not to rebuy the same funds in your Roth account you've just taken a loss on because then your can't correct it (because the new modified basis is on your Roth shares, and there is no value in realizing a loss in a Roth account).

Generally, if you're going to sell at a loss, you probably want to do some reading on "tax loss harvesting" to ensure you're knowledgeable about what you're doing.
Thanks for the heads up. Last investment in taxable was Jan 15 so I'm stopping automatic to do these after Feb 15.

Your "especially important" point has caught my attention. That was my plan, or at least rebuy Fidelity zero funds in the Roth. The overall goal is maxing tax advantaged accounts (which I wish I did a few years ago but can't fix that, just need to correct going forward).

I did have around $2k sitting in my taxable from dividends so I moved that over for Roth 2018.

I need to do more research but wondering if I should still TLH $3k then fund Roth 2018 with that (although in similar 3 fund allocations) or just leave it alone and go on with automatic investments to max out Roth 2019 and beyond??

Topic Author
sedonabogle
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Joined: Thu Jan 31, 2019 2:08 pm

Re: Am I missing out on Roth IRA

Post by sedonabogle » Mon Feb 11, 2019 9:50 am

mortfree wrote:
Sat Feb 09, 2019 2:14 am
Did you contribute to the traditional IRA in 2018?

If so, you can’t do the Roth for 2018, unless you didn’t max out the traditional.
No contributions to traditional IRA in 5 or more years. Just dividends and capital gains.

fujiters
Posts: 166
Joined: Tue Mar 06, 2018 2:17 pm

Re: Am I missing out on Roth IRA

Post by fujiters » Mon Feb 11, 2019 2:00 pm

sedonabogle wrote:
Mon Feb 11, 2019 9:41 am
fujiters wrote:
Sat Feb 09, 2019 12:59 am
carmonkie wrote:
Wed Feb 06, 2019 5:35 pm
sedonabogle wrote:
Wed Feb 06, 2019 3:24 pm
limeyx wrote:
Tue Feb 05, 2019 2:58 pm


Just did exactly this at the beginning of Jan
Did you do this with new funds or selling from existing taxed account?

I'm on the fence about which option to go - I'm leaning toward funding via new money vs. deciding what to sell from my existing account to avoid or minimize taxes.
I am funding 2019 with new money, but on your taxable you could Tax Loss Harvest and move that money to your Roth, then on your Roth buy a replacement fund.
I would not sell anything that would incur a tax bill.
But note that if you've been buying monthly throughout 2018, you probably have some losses. Sell anything that has a loss and use that to fund Roth. You get up to $3k/ year of losses to claim against your income, which lowers your tax bill. Then you get to avoid paying taxes on ongoing dividends and capital gains within the Roth.

Note: don't buy the same funds you take a loss on within 30 days (including before you sell), or you will have a wash sale. It's especially important not to rebuy the same funds in your Roth account you've just taken a loss on because then your can't correct it (because the new modified basis is on your Roth shares, and there is no value in realizing a loss in a Roth account).

Generally, if you're going to sell at a loss, you probably want to do some reading on "tax loss harvesting" to ensure you're knowledgeable about what you're doing.
Thanks for the heads up. Last investment in taxable was Jan 15 so I'm stopping automatic to do these after Feb 15.

Your "especially important" point has caught my attention. That was my plan, or at least rebuy Fidelity zero funds in the Roth. The overall goal is maxing tax advantaged accounts (which I wish I did a few years ago but can't fix that, just need to correct going forward).

I did have around $2k sitting in my taxable from dividends so I moved that over for Roth 2018.

I need to do more research but wondering if I should still TLH $3k then fund Roth 2018 with that (although in similar 3 fund allocations) or just leave it alone and go on with automatic investments to max out Roth 2019 and beyond??

If you sell all shares purchased within 30 days, there will be no wash sale. Fidelity zero funds track their own proprietary indexes, so you will not generate a wash sale if you purchase those in Roth (provided what you sold for a loss wasn't also the same zero fund)

Fund your 2018 Roth while you are still able. Better to have extra room in 2019 Roth should you later find you have enough to contribute fully to both.
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham

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