Author Topic: Roth Contributions in January  (Read 6210 times)

TonyPlush

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Roth Contributions in January
« on: December 23, 2014, 10:58:08 AM »
I have what seems to be a simple enough question, but I've had the hardest time finding an answer to this online.

In August 2014, I contributed $5,500 to a Vanguard Roth IRA. I currently have $5,500 in cash waiting to make the maximum 2015 roth contribution.

If I contribute $5,500 to my Vanguard Roth IRA in January 2015, will that count as 2015 contributions?

Everything I search gives me the "You're allowed to fund your 2014 IRA through April 2015." Does that mean all contributions before April count as 2014, or are you allowed to make 2015 contributions before April 15, 2015?

Jack

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Re: Roth Contributions in January
« Reply #1 on: December 23, 2014, 11:00:50 AM »
When you contribute to a Vanguard IRA between January 1 and April 15, the website prompts you to choose whether you want it to count as a current-year contribution or a previous-year contribution.

GGNoob

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Re: Roth Contributions in January
« Reply #2 on: December 23, 2014, 11:03:40 AM »
When you contribute to a Vanguard IRA between January 1 and April 15, the website prompts you to choose whether you want it to count as a current-year contribution or a previous-year contribution.

This. Just choose 2015 as your contribution year and you will be good to go.

DrF

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Re: Roth Contributions in January
« Reply #3 on: December 23, 2014, 11:07:59 AM »
The real question is why are you contributing to a Roth, and not a traditional?

What is your fed tax rate? If > 15% then traditional is the way to go.

http://www.madfientist.com/traditional-ira-vs-roth-ira/

and

http://www.madfientist.com/retire-even-earlier/

Enjoy!

tryp

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Re: Roth Contributions in January
« Reply #4 on: December 23, 2014, 11:53:25 AM »
Keep in mind that if you have a retirement plan at work, there is an income limit for tax deductions on a traditional IRA.  If your modified AGI (so after 401(k) is excluded) comes out to 70k or above, your traditional IRA contributions are taxed the same as they would be in a Roth.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2014-IRA-Contribution-and-Deduction-Limits-Effect-of-Modified-AGI-on-Deductible-Contributions-If-You-ARE-Covered-by-a-Retirement-Plan-at-Work


27y/oTennesseeRetiree

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Re: Roth Contributions in January
« Reply #5 on: December 23, 2014, 12:25:34 PM »
Quote
The real question is why are you contributing to a Roth, and not a traditional?

What is your fed tax rate? If > 15% then traditional is the way to go.

DrFunk, I disagree. This is my opinion and reasoning. The opportunity to pay taxes on the front end in order to be tax free on the back end's exponential growth is worth forgoing a write off now to have no tax liability in the future. A traditional IRA saves tax dollars today to pay unknown tax dollars tomorrow. A ROTH IRA pays known tax dollars today to eliminate unknown taxes tomorrow. I just don't see how you can plan for "retirement" and not control or eliminate as much unknown as you can.

It also sounds like you are planning to have less tax liability when you hit 59.5 then you do now, but you don't know what will happen with the government 10,15, 20, or if you are like me 30+ years from now. Personally I think my income will be higher in "retirement" than it is now and that I will be in a higher tax bracket. I also think the tax rates will be higher both for regular income and for long term capital gains.  And I know what my net anticipated return is precisely because I don't have to worry about taxes increasing or making too much money in "retirement".

Don't forget this also eliminates taxes on capital gains. This provides a lot of opportunity once your retirement account has significant cash reserves.

Roth's, in my opinion, are the best retirement vehicle out there. And they are certainly the best one I have found for me.

But let's look at my roth. Among other things. I own 17 apartment units inside my ROTH. Their value is about $725,000. I put down between 1% and 10% on all of them. They are amortized for 15 years or less and my highest interest rate is 3%. They will all be paid off by the time I am 45. My net at that point (with current rent values) will be about $80,000 a year.

$80,000 a year for 15 more years before I can touch it. With a Roth you can do fun things like not worrying about making sure your income is passive. Peer to peer lending. Financing Spec loans for builders. Flipping houses. Owning a portion of a business. I am not limited to keeping my returns passive to minimize taxes because I eliminated taxes on the front end. Taxes on an $80,000 a year draw... even at 15% are WAY higher than taxes on a $5500 a year contribution. 

This just seems more mustachian to me. (Not necessarily the $675,000 in debt in my Roth, but the rest of it for sure.) I use the term "retirement" loosely because hopefully as mustachians you will all be retired long before 59 and a half.

Iron Mike Sharpe

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Re: Roth Contributions in January
« Reply #6 on: December 23, 2014, 01:25:48 PM »
I disagree with the above post.

All money I would put into an IRA right now would be taxed at 25% if I wasn't using an IRA.  So, I could pay the 25% and put it into a Roth.  But if I do a traditional IRA, when I withdraw, my strategy will have some taxed at 0%, some at 10%, and the rest at 15% and none at 25%. 

While Congress, might play around with the bands a bit, the tax savings I get from using a Traditional will be so much greater than with a Roth.  There is no way that the politicians are going to make huge changes to the bottom tax brackets.  It would be political suicide.

MDM

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Re: Roth Contributions in January
« Reply #7 on: December 23, 2014, 01:44:33 PM »
I disagree

I disagree

The only incorrect answer here is one that does not agree with the assumptions implicit in the question.  Different assumptions, different correct answers - so the two folks above aren't necessarily disagreeing on the answer as much as each has different assumptions.

And that's a good thing because different people have different situations and it's good to have examples of them.

Check back in ~30 years to see who was right - might be one, the other, both, or neither....  Main thing is for folks to understand their own situations and act accordingly.

Johnez

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Re: Roth Contributions in January
« Reply #8 on: December 23, 2014, 02:11:34 PM »
I think regardless of tax treatment, for an early retiree, a Roth just makes a lot of sense. Especially if one has a 401k set up with their employer.

Calvawt

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Re: Roth Contributions in January
« Reply #9 on: December 24, 2014, 11:48:55 AM »
You just have to designate it as 2015.  It's pretty simple.


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neo von retorch

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Re: Roth Contributions in January
« Reply #10 on: December 24, 2014, 11:55:45 AM »
What does it mean to "own apartment units" and "have $675,000 debt" all inside of a ROTH IRA?

Indexer

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Re: Roth Contributions in January
« Reply #11 on: December 24, 2014, 05:21:33 PM »
Roth VS Trad.  A couple things come into play here.

1.  If you plan on retiring EARLY the Roth is better hands down.  You can take out your contributions tax free!  If you retire before 59 1/2 this is a big deal.

2.  The Roth VS IRA mathematical comparisons always assume you contribute more to the traditional because of the tax break(30% tax rate you can contribute 30% more).  One small problem here... if you contribute 5500 to a Roth you can't compare that to contributing 7150 to a traditional.  You have to compare it to contributing 5500 to a trad, and 1650 to a taxable account.  Run the numbers... the Roth is better even with a much higher current tax rate and a lower retirement tax rate.  The reason is that the taxable account and its taxes act like an anchor on the traditional's performance compared to the pure Roth.  If you are doing a MAX contribution with a long time horizon the Roth basically always wins because you can shelter MORE money in it on a tax adjusted basis.  100k sitting in a Roth is 100k, 100k sitting in a traditional is really 65k-90k ;).

3.  HSAs, employer contributions, profit sharing, pensions, etc. are all pre-tax.  If everything is in pretax accounts your hands are tied when you need to take money out.  If you need 50k one year for whatever reason you are in that tax bracket.  If you had some in the Roth you can take out of the pretax accounts till you hit the lower edge of the next tax bracket then only take out Roth money going forward to keep yourself in the lower bracket.  It gives you flexibility.  You can also do this the other way around. 

Quote
Keep in mind that if you have a retirement plan at work, there is an income limit for tax deductions on a traditional IRA.  If your modified AGI (so after 401(k) is excluded) comes out to 70k or above, your traditional IRA contributions are taxed the same as they would be in a Roth.

Correct, but its actually worse than that... the traditional IRA contributions would be taxable income without a deduction going in, and then any growth would still be taxable coming out!  Your 1k grows to 2k, when you take it out you pay taxes on the 1k worth of growth.  If you were in a Roth it would ALL be tax free at W/D.... which is why most people in the situation you describe just do a backdoor Roth contribution.  See even the rich like Roths.

MDM

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Re: Roth Contributions in January
« Reply #12 on: December 24, 2014, 05:43:25 PM »
1.  If you plan on retiring EARLY the Roth is better hands down.  You can take out your contributions tax free!  If you retire before 59 1/2 this is a big deal.
Depends on whose hands.  E.g., see Reply #3 above and the two links provided by DrFunk.  They make a good case for traditional if retiring early.

Quote
2.  The Roth VS IRA mathematical comparisons always assume you contribute more to the traditional because of the tax break(30% tax rate you can contribute 30% more).  One small problem here... if you contribute 5500 to a Roth you can't compare that to contributing 7150 to a traditional.  You have to compare it to contributing 5500 to a trad, and 1650 to a taxable account.  Run the numbers... the Roth is better even with a much higher current tax rate and a lower retirement tax rate.  The reason is that the taxable account and its taxes act like an anchor on the traditional's performance compared to the pure Roth.  If you are doing a MAX contribution with a long time horizon the Roth basically always wins because you can shelter MORE money in it on a tax adjusted basis.  100k sitting in a Roth is 100k, 100k sitting in a traditional is really 65k-90k ;).
Careful about "always" - similar to "never say never".  E.g. see http://forum.mrmoneymustache.com/welcome-to-the-forum/identifying-common-financial-misconceptions/msg470360/#msg470360.  If you follow the link in that post to the bogleheads thread you can see the math details.  Depends on one's definition of "much higher" and "lower" in the above quote.

Quote
Keep in mind that if you have a retirement plan at work, there is an income limit for tax deductions on a traditional IRA.  If your modified AGI (so after 401(k) is excluded) comes out to 70k or above, your traditional IRA contributions are taxed the same as they would be in a Roth.
Quote
Correct, but its actually worse than that... the traditional IRA contributions would be taxable income without a deduction going in, and then any growth would still be taxable coming out!  Your 1k grows to 2k, when you take it out you pay taxes on the 1k worth of growth.  If you were in a Roth it would ALL be tax free at W/D.... which is why most people in the situation you describe just do a backdoor Roth contribution.  See even the rich like Roths.
Many current high-income earners would prefer the traditional IRA, but there is that low upper income limit.  The backdoor Roth is indeed "better than nothing" (i.e. a taxable account) and also better than making a non-deductible tIRA contribution and leaving it there.

27y/oTennesseeRetiree

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Re: Roth Contributions in January
« Reply #13 on: January 05, 2015, 11:05:10 AM »
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What does it mean to "own apartment units" and "have $675,000 debt" all inside of a ROTH IRA?

Neogodless,

You don't have to buy stocks inside of your IRA or ROTH IRA. The reason most people limit themselves to that is because that is all most brokerages that manage accounts allow people to invest in. It is all they sell and how they get paid.

That being said there are non traditional IRA Account Managers that let you invest in non traditional investments. For me that is long term real estate, but it can be short term real estate, private money lending, peer to peer lending, or even art.

There are lots of rules and you have to avoid taxable events. You can't buy or sell things from linear family members. You can't profit from the sale (no real estate commissions, etc.) You can't use the property (no using a vacation rental, you could loan the art to a museum but not hang it in your home.)

I buy multifamily rental units from burned out landlords with seller carried mortgages. I have bought 4 buildings for a total of 17 units. My down payments have been from 1-10%. Interest rates at or lower than 3%. Amortized less than 15 years. These are non-recourse loans (my ira can't benefit from my signature). The properties are in property management (self-management is too hands on). 

I like this... I am 30. I have maxed out my Roth for 8 years (counts 2015) and did a little bit prior to that. My roughly $50k in contributions is worth about $110k. My principal reduction alone this year will be an additional $35k. When I am 45 all 17 units I have currently will be paid off. Even if rents drop and they only rent for $500... that is $85k a year (after expenses/ vacancy). The best part is it is tax free and a I can't touch it for 15 more years. Snowballing and compunding...

So... yes... it is hard for me to get excited about stocks and dividends when there is leverage in real estate and no taxes (otherwise one off my largest expenses.)

astvilla

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Re: Roth Contributions in January
« Reply #14 on: January 05, 2015, 11:18:46 AM »
I had same question too, thank you for asking.