Monday, January 08, 2007

Roth contribution or many?

People always ask should they contribute one $4k deposit to a Roth IRA or should they contribute $333/monthly? The answer should deposit $4k on January 2nd of the year to get the longest possible time of tax free investing. Because you deposit every year and leave it alone, that will be a form of dollar cost averaging. The idea is that the capital gains are not taxed, unlike leaving the $4k in a Money Market earning income and transferring $333/month. Every month you'd dollar cost average, but you'd also be paying short term capital gains on the interest.

However the reason why investing $333/month is popular is not many people are able to stash aside $4k for a lump sum contribution. Therefore it's better to invest what you can when you, than to not invest at all. I'd rather see someone putting away $500/month into a Roth IRA then trying to save up $4k and never doing it.

Personally I do a lump sum investing in a Roth IRA. However, I just made 2006 contribution in Jan 2007, why? Because of our strange circumstances with bonuses and income, we are on the cusp of being phased out of the Roth IRA income limits. Thus I am not fond of the idea of withdrawing my contribution in March 2007, and paying taxes on any income if we're over the $150k married filing joint limit.

The problem is that the only deduction eligible for deciding what you modified adjusted gross income will be is a 401k contribution. We already max that out last year so I wasn't sure if what our income would be. Last year our income was getting close and this year too. Especially since my DH's annual bonus, raise, and promotion is in February. His signing bonus occurs every december so you can understand how we're never sure what our income looks like until the end.

But I personally like the lump sum contribution, plus by saving it during the year, it acts like an extra cash EF for emergencies. Which I think is great because it gives me more flexibility without having to pull it out of our stocks.

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