The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: minimalistgamer on September 11, 2016, 10:32:58 PM
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The title says it all. We are 3 paychecks away from the end of the year, and based on my calculations, We going to have enough money to maximize my Roth IRA contributions at the very beginning on the year.
So is it a good idea to contribute all of it as soon as I can, or would you recommend spreading it out? I do not intend to touch the money until retirement. We are blessed with enough savings to where we don't have to use our retirement money.
Thanks for your suggestions,
MG.
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The title says it all. We are 3 paychecks away from the end of the year, and based on my calculations, We going to have enough money to maximize my Roth IRA contributions at the very beginning on the year.
So is it a good idea to contribute all of it as soon as I can, or would you recommend spreading it out? I do not intend to touch the money until retirement. We are blessed with enough savings to where we don't have to use our retirement money.
Thanks for your suggestions,
MG.
It is always optimal to dump money into the market as a lump sum, but many prefer the psychological benefits of dollar cost averaging, in case the market tanks right after the deposit. Over a decades long timeline it won't matter that much either way so just go with what makes you feel the most confident/secure.
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Nobody can tell you whether doing a full contribution right away next year will be better. What we can tell you is that most of the time the market goes up between January 1 and December 31. Some years will be exceptions to this rule, but if you make a habit of front-loading your contributions you'll almost certainly do better over the long run than if you make a habit of spreading out your contributions.
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I usually wait until the end of the year to contribute to my IRA, in order to determine whether a Traditional or Roth will be better for my tax return.
At the end of the year, I have the full picture of what my taxes will be like.
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The short answer is YES. Over an extended period, the sooner the funds are invested, the more you will earn tax free. However, for any given year, it is possible that Jan 1 is not the optimal time to dump a lump sum into the market. For example, in 2016, the market tanked early in the year, then recovered after (several ?) some months. This is impossible to predict.
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I'd do it, but make sure to double-check at tax time whether you have an outsize benefit to recharacterizing to a traditional IRA.
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Thank you for your replies.
> I usually wait until the end of the year to contribute to my IRA, in order to determine whether a Traditional or Roth will be better for my tax return.
I am not sure how I can go about figuring that out. Can someone either explain this to me or point me towards some place where I can read about how to figure this out? Also, I have a Roth IRA account with Vanguard. I do not have a traditional IRA account.
I decided I am going to contribute the full amount because in a way I will be dollar cost averaging. It will be every year as opposed to every month.
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I decided I am going to contribute the full amount because in a way I will be dollar cost averaging. It will be every year as opposed to every month.
You've got the right idea. Bottom line- over 3 or 4 decades of contribution, once a year investing is plenty of averaging.
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> I usually wait until the end of the year to contribute to my IRA, in order to determine whether a Traditional or Roth will be better for my tax return.
I am not sure how I can go about figuring that out. Can someone either explain this to me or point me towards some place where I can read about how to figure this out? Also, I have a Roth IRA account with Vanguard. I do not have a traditional IRA account.
I don't have a good link handy, but the way I understand it is that you want to do Roth if you think your tax rate will be higher in retirement (because you'll pay the taxes now) and traditional if you think it will be lower (because you'll pay the taxes then). We did Roth for years, but once we got into the 25% federal bracket, traditional made more sense. This year, DW is a SAHM, so we're actually back in the 15% bracket. So I'm curious to see if someone has a formula or something, because it might be worth doing this year as a Roth.
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I don't have a good link handy, but the way I understand it is that you want to do Roth if you think your tax rate will be higher in retirement (because you'll pay the taxes now) and traditional if you think it will be lower (because you'll pay the taxes then). We did Roth for years, but once we got into the 25% federal bracket, traditional made more sense. This year, DW is a SAHM, so we're actually back in the 15% bracket. So I'm curious to see if someone has a formula or something, because it might be worth doing this year as a Roth.
The Mad Fientist talks about these issues a lot. It's well worth a read.
http://www.madfientist.com/traditional-ira-vs-roth-ira/
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I don't have a good link handy, but the way I understand it is that you want to do Roth if you think your tax rate will be higher in retirement (because you'll pay the taxes now) and traditional if you think it will be lower (because you'll pay the taxes then). We did Roth for years, but once we got into the 25% federal bracket, traditional made more sense. This year, DW is a SAHM, so we're actually back in the 15% bracket. So I'm curious to see if someone has a formula or something, because it might be worth doing this year as a Roth.
The Mad Fientist talks about these issues a lot. It's well worth a read.
http://www.madfientist.com/traditional-ira-vs-roth-ira/
Thanks for the link, I appreciate it. Will give it a read.
MG.
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This has been my MO for years for both DH and I. In Mar 2016, we ended up recharacterizing our Jan 2015 contributions from a Roth to a Traditional, so you don't necessarily need to wait until year end to contribute just to make the Roth or Trad. call. I don't see my tax rates changing much in FI, so I just like to have a good mix of both already-taxed and to-be-taxed funds around for flexibility in draw down options in RE.