Roth IRAs Maxed out for 2006
Tip It!After putting our 2006 Roth IRA contributions on hold earlier this year due to our big move, my wife and I managed to max out our accounts this week. In fact, once things settled down after the move, we actually had the money on hand to max out both of our accounts in one fell swoop. Rather than dumping all the money into the market at once, however, we decided to spread it out over the final four months of the year. As it turns out, we actually got this done a good bit earlier than normal… After all, we usually end up doing it shortly before the April 15th deadline of the following year. But now that we have 2006 knocked out, we can set to work on our 2007 contributions right off the bat in January.
Published on December 15th, 2006 - 9 Comments
Filed under: Saving & Investing, Taxes
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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December 15th, 2006 at 9:22 am
Today is the day of the last automatic deposit for my 2006 Roth IRA. I spread the whole thing out in equal purchases throughout the entire year.
December 15th, 2006 at 9:59 am
Glad to hear you got everything in early this year!
I have to say though, I am of the opinion that you should make the contributions as soon as possible. The first trading day of every year, I put in my Roth IRA contribution.
The reason I do this is that it allows me an entire year of tax free growth. If I wait until December, I’ve lost the opportunity for that $4000 to grow over the course of the year, tax free.
For me, it’s better to have the $4,000 in a tax free account than to have it in my High Yield Savings account earning 5%, taxed in my normal tax bracket.
-William
December 15th, 2006 at 10:58 am
William, I agree. After all, if the long term trend of the market is upward, odds are that it will go up as opposed to down during the following 15.5 months (from Jan 1 to April 15 of the following year). In general, the earlier you can get your money in the market the better.
And yes, there is something to be said for dollar cost averaging (DCA) as a risk avoidance strategy, but people need to keep in mind that investing it all on the first trading day of the year is still DCA, but with less granularity (regular annual investments as opposed to regular monthly investments).
December 16th, 2006 at 5:36 pm
This was my first year that I actually was done funding my Roth IRA in the same year like you did…
January 1st, I start sending my money in for 2007 and it feels really good….I wish I could fund the Roth IRA in one swoop like WIlliam did, but even if you can get, say $1000 in the account in January, it’s better than still having to pay money to your 2006 contribution in 2007…
William…Are you suggesting sending in the $4000 right off the bat from your money market savings, then play catch-up with the savings account later? Its a good idea, will have to think about that one….
December 16th, 2006 at 8:24 pm
I agree with William. I put some extra money aside near the end of every year to max my Roth out as soon as possible the next year. I just dump it into a good index fund immediately. No sense in putting off potential tax-free gains.
If you are going to consider DCA’ing in smaller increments, I think it only makes any kind of sense with no-transaction fee funds. Any commission costs are likely to hurt with relatively small transactions ($4000 doesn’t split into many substantial purchases).
Given that you can withdraw principal from a Roth without penalty at any time, it’s not ureasonable to fund your Roth and count it as part of your emergency funds. Since you can’t replace withdrawn money, you shouldn’t think about it unless it’s a REAL emergency however (not an emergency purchase of a pair of shoes you like).
December 16th, 2006 at 9:54 pm
We haven’t been contributing as much as we should to our Roth IRAs, but we always split our tax refund into two pieces and put some in mine and some in my wife’s. Admittedly, we should have less withheld in taxes, but we’ve had enough changes each year that it’s tough to get the numbers just right. I’d rather get a little extra back than owe money at the end of the year.
Since we’re not making our contribution for the year until March or April of the following calendar year, we’re a long ways behind those of you who are saving up and plopping down your full amount for a given year during January of that year. We could just skip a year and start doing it that way, but to me it seems like our approach is the best one for our current situation. If the annual limit is $4,000 per Roth, through April 2007 we have up to $8,000 that we can contribute (2006 + 2007). If we were to put the money towards the 2007 limit, we would be giving up the $4,000 we could have contributed in 2006. But if we contribute it against our 2006 limit, we can still make our full 2007 contributions in addition to (rather than instead of) our 2006 contributions.
December 17th, 2006 at 2:59 pm
Which mutual funds do you invest in with your ROTH IRA?
I’m currently looking to add a new fund to my portfolio.
I loved to see a post on your holdings.