Where to save next years (2020) IRA contribution funds

[35andFI]

Hello!

I'll be maxing my 2019 Traditional IRA via a lump sum on 1/1/2019.

My question is what to do with the money that I'll be saving to max my 2020 IRA which I will also be putting in as a lump sum.

Let's say that the max for 2020 will be $6,000.
I was planning on saving $500 a month (6000/12) in my checking account through 2019 to then contribute the full $6k on 1/1/2020.

Would it be better to contribute that $500/mo to my taxable account and then withdraw it to put into my 2020 IRA? Are there any downsides of doing this?

Thanks and Merry Christmas!

[katsiki]

Lots of threads on short term savings if you can find them.

Usually, the suggestions are: high yield savings (Ally, Discover, etc), CDs and treasury bills.

I am no expert but I think investing into taxable and withdrawing would be a bad idea for 12-13 mos.

Good luck!

[35andFI]

Lots of threads on short term savings if you can find them.

Usually, the suggestions are: high yield savings (Ally, Discover, etc), CDs and treasury bills.

I am no expert but I think investing into taxable and withdrawing would be a bad idea for 12-13 mos.

Good luck!

Thank you! That was my thinking as well until the taxable route was suggested to me by another forum member. I’d like to give them the benefit of the doubt and see if it would make sense.

If the market is down and I sell, wouldn’t it be fine since I would be putting the funds right back into the market at that low rate? I invest in VTSAX in both my IRA and taxable so the funds are the same.

If the market is up and I sell then I end up paying capital gains (I believe it would be long term cg since there will have been more than $6k in the taxable account for over a year).

If the market is neutral I assume this would be the same as keeping the funds in my checking account.

I’d love to hear any challenges to this logic or any assumptions that I am missing or have incorrect.

Also, after this was suggested to me, I found this link which isn’t the exact situation but I believe is related:
https://www.betterment.com/resources/why-you-should-dip-into-your-taxable-account-to-max-out-your-ira/

They argue that it would be advantageous to pull from a taxable account to fund an IRA.

[jacoavluha]

ideally at some point we all have cash flow excess to our immediate needs and monthly nut and emergency savings and available retirement / deferred tax space as applicable, and so we have excess cash and have to figure out what to do with it, while planning for future expenses. Future IRA contributions are one consideration that you just have to factor in. You can specifically set aside then money if you like but at some point I think you just allocate excess cash to your taxable account and when a new year comes around you pull from taxable in a tax optimized manner and fund your IRA. Or whatever other expense you're addressing. If all your taxable holdings are up and you don't want to incur taxable gains then you pull from emergency fund temporarily and allocate future cash flow to replenish the E fund

[35andFI]

ideally at some point we all have cash flow excess to our immediate needs and monthly nut and emergency savings and available retirement / deferred tax space as applicable, and so we have excess cash and have to figure out what to do with it, while planning for future expenses. Future IRA contributions are one consideration that you just have to factor in. You can specifically set aside then money if you like but at some point I think you just allocate excess cash to your taxable account and when a new year comes around you pull from taxable in a tax optimized manner and fund your IRA. Or whatever other expense you're addressing. If all your taxable holdings are up and you don't want to incur taxable gains then you pull from emergency fund temporarily and allocate future cash flow to replenish the E fund

Thanks for your reply.

So putting 2020’s IRA contribution into my taxable account on a monthly basis (then selling to max 2020 IRA) would be a better strategy than keeping it in my checking account until 2020?

How do you pull from taxable in a tax optimized manner? Does that mean selling when the market is down?

[jacoavluha]

Purely from a tax perspective, best to worst: short term losses, long term losses, long term gains, short term gains.

So if you want to fund an IRA on 1/1/2020, maybe last week of Dec 2019 you look to harvest losses. If you have none, then wait until after 1/1 and sell and incur the least amount of long term gains. Never short term gains.

[frugalnacho]

Why not just invest monthly into a taxable account, then when 2020 rolls around just leave it in the taxable account and allocate new monthly deposits into your Roth? If you come up short on savings in 2020 you can always sell the taxable to get the funds to max the roth. 

[35andFI]

Why not just invest monthly into a taxable account, then when 2020 rolls around just leave it in the taxable account and allocate new monthly deposits into your Roth? If you come up short on savings in 2020 you can always sell the taxable to get the funds to max the roth.

That would work. Didn't even think of that! Traditional IRA though, not Roth.

Thanks!

[Rob_bob]

When moving funds from a taxable account to an IRA why sell in taxable and repurchase in IRA? My TDA account has the option of just transferring shares, all or whatever number I want.

If there are capital gains is it taxable when moving to the IRA (Roth) even when I'm not selling?  Probably since those gains would never be taxed in the future?

Either way the money you are talking about is long term money since you are going to put it in an IRA, so it's time in the market, not timing the market.  Do you keep it in cash hoping the market will be down next year, or do you lose out on a years worth of gains before putting it in an IRA?

[jacoavluha]

When moving funds from a taxable account to an IRA why sell in taxable and repurchase in IRA? My TDA account has the option of just transferring shares, all or whatever number I want.

If there are capital gains is it taxable when moving to the IRA (Roth) even when I'm not selling?  Probably since those gains would never be taxed in the future?

Yeah I’m pretty sure your “transfer” at TDA would be a taxable event. You should find out. I don’t believe such a strategy is allowed, in order to wipe away what would be capital gains taxes. Please ask TDA and report back.

[terran]

When moving funds from a taxable account to an IRA why sell in taxable and repurchase in IRA? My TDA account has the option of just transferring shares, all or whatever number I want.

No, it doesn't. It may look like this, but you can't transfer shares from taxable to an IRA. TD Ameritrade must be selling the shares in taxable (a taxable event if there have been gains) and rebuying in your IRA.

[Rob_bob]

When moving funds from a taxable account to an IRA why sell in taxable and repurchase in IRA? My TDA account has the option of just transferring shares, all or whatever number I want.

No, it doesn't. It may look like this, but you can't transfer shares from taxable to an IRA. TD Ameritrade must be selling the shares in taxable (a taxable event if there have been gains) and rebuying in your IRA.

Yeah that might be the way it works.  In the past I just sold shares moved cash a repurchased.  Then I noticed the option to "transfer" shares.  Maybe if I do it this way it will be commission free, that would be nice.  Anyway I'm going to try it and see how it works, any cap gains are taxed at 0% in my bracket.

[Nothlit]

I think of my income like water flowing out of a hose. Starting January 1 each year, I aim the hose at my IRA bucket until that bucket is full. Then I aim the hose at my taxable account bucket for the rest of the year. Of course the taxable account bucket is bottomless so it can never be “full.” Repeat next year. No need to exchange water between the buckets.

[35andFI]

I think of my income like water flowing out of a hose. Starting January 1 each year, I aim the hose at my IRA bucket until that bucket is full. Then I aim the hose at my taxable account bucket for the rest of the year. Of course the taxable account bucket is bottomless so it can never be “full.” Repeat next year. No need to exchange water between the buckets.

Nice analogy and point well taken.
This makes perfect sense even though it will require a (very) little more effort on my part.
I am now planning on doing it this way starting on 1/1/2020.

Thanks!

[Radagast]

I think of my income like water flowing out of a hose. Starting January 1 each year, I aim the hose at my IRA bucket until that bucket is full. Then I aim the hose at my taxable account bucket for the rest of the year. Of course the taxable account bucket is bottomless so it can never be “full.” Repeat next year. No need to exchange water between the buckets.

Nice analogy and point well taken.
This makes perfect sense even though it will require a (very) little more effort on my part.
I am now planning on doing it this way starting on 1/1/2020.

Thanks!

I like the analogy too, and in theory that way is best. Personally I space my IRA investments out evenly each month to simplify things, so $500 every 1st for 2019. Holding on to cash for a year so you can max it out on January 2 will leave a lot of money behind.

[35andFI]

I like the analogy too, and in theory that way is best. Personally I space my IRA investments out evenly each month to simplify things, so $500 every 1st for 2019. Holding on to cash for a year so you can max it out on January 2 will leave a lot of money behind.

Yep! Going forward I won’t be keeping so much in my checking account.
I am putting the 2019 max in today but will then do either this or as described in my last post for 2020. I do like the simplicity of even monthly contributions but the tax free growth (and the certainty of maxing it) might outweigh the simplicity for me.

[frugalnacho]

When moving funds from a taxable account to an IRA why sell in taxable and repurchase in IRA? My TDA account has the option of just transferring shares, all or whatever number I want.

No, it doesn't. It may look like this, but you can't transfer shares from taxable to an IRA. TD Ameritrade must be selling the shares in taxable (a taxable event if there have been gains) and rebuying in your IRA.

Yeah that might be the way it works.  In the past I just sold shares moved cash a repurchased.  Then I noticed the option to "transfer" shares.  Maybe if I do it this way it will be commission free, that would be nice.  Anyway I'm going to try it and see how it works, any cap gains are taxed at 0% in my bracket.

It definitely works this way; All IRA contributions (except rollovers) must be made in cash.  They are just doing everything behind the scenes so you don't have to deal with each step. 

[jacoavluha]

^^^ and in the case of an "exchange" from taxable to IRA you're doing yourself a disservice if you don't understand the tax ramifications from the transaction on the taxable side. You might incur short term capital gains taxes, or generate a wash sale unknowingly. You really need to look at this as two entirely separate transactions.