Dividing Roth IRA Contributions Between Tax Years

[ferguson]

Hi, I have been learning a lot from the MMM forums. I have a question regarding Roth IRA contribution credits and I was not able to find similar information elsewhere. I am interested in buying a Vanguard fund as a Roth IRA at the minimum $3,000 investment. I am in a lower income bracket and I plan to save approximately $1,500/year in my Roth IRA (I will soon be eligible for a matching 401k and will do both when I am able) and use the 10% savers credit when filing taxes. The savers credit is only good up to $2,000. Should wait until January to purchase the investment and divide it between the two years. Is this even an option to credit $1,500 for the 2015 tax year and the other half for the 2016 tax year?

Thanks for your time

[terran]

Yeah that should work. Between January 1 and April 15 you can select which year you would like to make the contribution to. You might need to do two separate transactions, but it should work out.

Just for future reference, if it weren't for the savers tax credit (good thinking on that), I would probably say contribute as much as you can for the previous year because then you have a whole year to save up for the current year, so you might be able to get more in than you expect. May as well use up as much tax advantaged space as you can before you lose it.

The same thinking could apply to say you may as well max out the $2k of the savers tax credit for 2015, and maybe you can eke out an extra $500-1000 for next year by the time that rolls around (put the credit towards it and that should get you started or do the whole thing depending on how much you make).

[MDM]

Yeah that should work. Between January 1 and April 15 you can select which year you would like to make the contribution to. You might need to do two separate transactions, but it should work out.

Just for future reference, if it weren't for the savers tax credit (good thinking on that), I would probably say contribute as much as you can for the previous year because then you have a whole year to save up for the current year, so you might be able to get more in than you expect. May as well use up as much tax advantaged space as you can before you lose it.

The same thinking could apply to say you may as well max out the $2k of the savers tax credit for 2015, and maybe you can eke out an extra $500-1000 for next year by the time that rolls around (put the credit towards it and that should get you started or do the whole thing depending on how much you make).

+1

Add me to the "no time like the present" camp.

ferguson, you seem to have done your homework well on the saver's credit - good for you.  Getting access to 2015 tax software ASAP might be worthwhile to ensure you do arrange things appropriately.  Unfortunately TaxCaster doesn't (at least, didn't) calculate the saver's credit at all.  Meanwhile you might look at the case study spreadsheet, which seems to do the saver's credit calculations correctly (but doesn't handle oh-by-the-ways such as someone who is a full time student).

[ferguson]

You might need to do two separate transactions, but it should work out.

This is what I wasn't sure I could do. Since the Vanguard VFINX fund requires a minimum 3k contribution, it would need to be one transaction. I was wondering if you could list on your taxes only half of a transaction.

Add me to the "no time like the present" camp.

Do you mean I should invest the 3k for this year and whatever I lose in not being able to apply for next year will be balanced out by the compounding effect?

Thanks for the replies!

[Cromacster]

You might need to do two separate transactions, but it should work out.

This is what I wasn't sure I could do. Since the Vanguard VFINX fund requires a minimum 3k contribution, it would need to be one transaction. I was wondering if you could list on your taxes only half of a transaction.

If I remember correctly Vanguard lets you split the years within a single transaction.  Even if you can't, just do two transactions into a money market fund, then transfer the sum to VFINX.

Add me to the "no time like the present" camp.

Do you mean I should invest the 3k for this year and whatever I lose in not being able to apply for next year will be balanced out by the compounding effect?

Thanks for the replies!

I don't really see the benefit of splitting the years if you're not maxing it out.  If it were me, I would do 3k for the current year, or at least up to the max amount for the savers credit (4k 2k I think).  If you are able to contribute more in 2016, do it.

[MDM]

This is what I wasn't sure I could do. Since the Vanguard VFINX fund requires a minimum 3k contribution, it would need to be one transaction. I was wondering if you could list on your taxes only half of a transaction.

Other very good Vanguard funds (e.g., the Target Date ones) have a $1K minimum.

Do you mean I should invest the 3k for this year and whatever I lose in not being able to apply for next year will be balanced out by the compounding effect?

Not sure what you mean by "not being able to apply"...?  In any case, yes, compounding is a good thing.

I know you have been mentioning Roth, and that usually makes sense in the 10-15% tax bracket.  If you are close to the $18,250 cutoff for a 50% saver's credit, however, doing traditional instead of Roth might be better - due to the much larger tax savings.  You could run the numbers both ways and check.

[seattlecyclone]

You mentioned having $1,500 for your IRA each year, plus you plan to make 401(k) contributions when you become eligible. In case you weren't aware, 401(k) contributions count toward the saver's credit too. Why not save at least $2,000 for this year to max out your saver's credit, then try to do the same next year? You might fall short of the $2,000 limit next year, but then again you might not! For all you know, you'll be able to earn a bit more or spend a bit less, and meet or exceed the $2,000 level.

As to your question about Vanguard's $3,000 minimum, you might be able to do one single transaction for both years as someone else mentioned. If not, just park your 2015 contribution in a target retirement fund (minimum $1,000) for a few days, then switch to your desired fund with your 2016 contribution.