Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

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slowandsteadywins
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Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by slowandsteadywins »

Hi all,

I have been using YNAB to budget monthly savings to reach $6,000 by 2022 to lump sum into my Roth IRA so the remainder of monthly budget for investing can be put into my taxable account as well. My 2021 Roth IRA contribution limit has been hit. I am contributing $19,500 to my 401k over the year.

The more I’ve thought about it, I began to wonder if it would be more wise to simply add what I can in my budget for investment to the taxable account now, and once the new year begins, continue that, but begin with the Roth IRA until I hit $6,000.

So..

A.) Save monthly for goal of $6,000 for 2022 to lump sum into Roth IRA and save smaller excesses of this monthly savings goal to taxable

OR

B.) Put any excess monies to monthly budget for short term savings goals (monthly to <5 years) all into my taxable investment, and once 2022 hits, put these same excess funds into my Roth IRA until $6,000
"Nothing in this world can take the place of persistence; Persistence and determination alone are omnipotent." | -Calvin Coolidge
infotrader
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by infotrader »

Start saving in taxable today.
Lump sum contribute whatever you have saved to Roth on Jan. 1 2022.
Continue to contribute to the 2022 Roth until you hit the annual limit.
TheHouse7
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by TheHouse7 »

B, might want to create a mini-budget for your after tax account so there is always $6,000 earmarked for the beginning of the year.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
TropikThunder
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by TropikThunder »

slowandsteadywins wrote: Fri Jul 30, 2021 7:02 pm Hi all,

I have been using YNAB to budget monthly savings to reach $6,000 by 2022 to lump sum into my Roth IRA so the remainder of monthly budget for investing can be put into my taxable account as well. My 2021 Roth IRA contribution limit has been hit. I am contributing $19,500 to my 401k over the year.

The more I’ve thought about it, I began to wonder if it would be more wise to simply add what I can in my budget for investment to the taxable account now, and once the new year begins, continue that, but begin with the Roth IRA until I hit $6,000.

So..

A.) Save monthly for goal of $6,000 for 2022 to lump sum into Roth IRA and save smaller excesses of this monthly savings goal to taxable

OR

B.) Put any excess monies to monthly budget for short term savings goals (monthly to <5 years) all into my taxable investment, and once 2022 hits, put these same excess funds into my Roth IRA until $6,000
I asked a similar question a couple years ago. I had received ~$14,000 and used half to fund my Roth IRA for that year in a lump sum. I asked what to do with the rest of it. Livesoft gave an answer that has stuck with me since. He said something like "If the IRA limit was $14,000 instead of $7,000, would you fund the whole thing now or wait?" So I put the other half in the same funds in taxable that I would have used in my IRA. Jan 1 of the next year, I moved it to my IRA.
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slowandsteadywins
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by slowandsteadywins »

Thanks all. It makes sense the more I consider it. These funds are for long term investing for goals beyond 5 year time span, regardless of source. More time in market makes sense; so taxable now. I can contribute what I can up until $6,000 limit in 2022, and if for some reason I am unable to do so from new income, I can transfer the difference from taxable to Roth IRA.
"Nothing in this world can take the place of persistence; Persistence and determination alone are omnipotent." | -Calvin Coolidge
BrokerageZelda
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by BrokerageZelda »

Looking for clarification because I may be in a position to do this for my 2022 Roth IRA contribution.

Is the idea that I would start buying VTI (for example) in a taxable account this year, and then right after January 1 of next year, sell the entire VTI position and buy back the VTI inside my Roth IRA?
MrJedi
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by MrJedi »

BrokerageZelda wrote: Sat Jul 31, 2021 12:05 pm Looking for clarification because I may be in a position to do this for my 2022 Roth IRA contribution.

Is the idea that I would start buying VTI (for example) in a taxable account this year, and then right after January 1 of next year, sell the entire VTI position and buy back the VTI inside my Roth IRA?
To keep it simple I would just leave the taxable and put new contributions into the Roth IRA. If you are unable to max the Roth IRA otherwise, then you can consider selling and rebuying.
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Lee_WSP
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by Lee_WSP »

Why would you ever do A?

Put it into taxable now and next year DCA into the IRA with your earnings. Excess earnings go into taxable and IRA contributions on a schedule seems the easiest way to implement such a plan.
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OuterBanks
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by OuterBanks »

Roth IRA compounding of returns is so important that I recommend you max it out at the beginning of each year. Any money waiting to be added for next year’s Roth IRA contribution should also be invested in the stock market in a taxable account. Vanguard let’s you exchange mutual funds from your taxable account into your Roth IRA in the same transaction for the exact $6,000 amount without missing a single trading day. Any profits on the $6,000 sold in the taxable account is insignificant compared to 30+ years of extra compounding of returns in the Roth IRA.
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slowandsteadywins
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by slowandsteadywins »

OuterBanks wrote: Sun Aug 01, 2021 7:38 am
Thanks, OuterBanks!
"Nothing in this world can take the place of persistence; Persistence and determination alone are omnipotent." | -Calvin Coolidge
4tunates1
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by 4tunates1 »

OuterBanks wrote: Sun Aug 01, 2021 7:38 am Roth IRA compounding of returns is so important that I recommend you max it out at the beginning of each year. Any money waiting to be added for next year’s Roth IRA contribution should also be invested in the stock market in a taxable account. Vanguard let’s you exchange mutual funds from your taxable account into your Roth IRA in the same transaction for the exact $6,000 amount without missing a single trading day. Any profits on the $6,000 sold in the taxable account is insignificant compared to 30+ years of extra compounding of returns in the Roth IRA.
Great information! Can anyone attest if Fidelity offers this same feature?

Thanks
Vanguard User
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by Vanguard User »

Is it a good idea to withdraw from taxable brokerage account to fully fund Roth IRA at lumpsum?
lakpr
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by lakpr »

Vanguard User wrote: Sun Aug 01, 2021 8:09 pm Is it a good idea to withdraw from taxable brokerage account to fully fund Roth IRA at lumpsum?
If you do not have other funds that aren't invested yet, I don't see why not?
lakpr
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by lakpr »

BrokerageZelda wrote: Sat Jul 31, 2021 12:05 pm Looking for clarification because I may be in a position to do this for my 2022 Roth IRA contribution.

Is the idea that I would start buying VTI (for example) in a taxable account this year, and then right after January 1 of next year, sell the entire VTI position and buy back the VTI inside my Roth IRA?
Almost the right idea, but be careful about carrying the same investments in your Roth IRA and taxable account. It may make you subject to wash sales rules inadvertently. Ideally, you should have zero overlap in funds between taxable and Roth. If your brokerage firm is Fidelity, for example, buy VTI in taxable now, sell $6000 worth of VTI right after January 1, then buy FSKAX in the Roth IRA (not VTI). If your brokerage firm is Vanguard, then buy an approximation of total stock market, which is 4:1 ratio of VFIAX (or VOO) and VEXAX (or VXF). Or a 6:1 ratio between VLCAX (or VV) and VSMAX (or VB).
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by Vanguard User »

lakpr wrote: Mon Aug 02, 2021 5:04 am
Vanguard User wrote: Sun Aug 01, 2021 8:09 pm Is it a good idea to withdraw from taxable brokerage account to fully fund Roth IRA at lumpsum?
If you do not have other funds that aren't invested yet, I don't see why not?
What do you mean other funds? I only use FZROX for Roth IRA and my taxable is just VTSAX.

This will also generate a tax event on withdrawal of $6k.
lakpr
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by lakpr »

Vanguard User wrote: Mon Aug 02, 2021 6:11 pm
lakpr wrote: Mon Aug 02, 2021 5:04 am
Vanguard User wrote: Sun Aug 01, 2021 8:09 pm Is it a good idea to withdraw from taxable brokerage account to fully fund Roth IRA at lumpsum?
If you do not have other funds that aren't invested yet, I don't see why not?
What do you mean other funds? I only use FZROX for Roth IRA and my taxable is just VTSAX.

This will also generate a tax event on withdrawal of $6k.
"funds" as in money, not mutual funds. Do you have any other money that is not invested (sitting in a bank account, or expected wages next week/month, etc.) ?

If yes, use THAT money to fully fund the Roth IRA.

If you do not, then go ahead and withdraw the taxable account money and fully fund the Roth IRA. With taxable account, you continue to incur tax cost on future dividends and growth. With Roth you will not any more.

Using Specific ID basis on VTSAX you should be able to find lots that have the highest cost basis (and thus the lowest gains), which can be liquidated at a fairly modest cost.
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by Vanguard User »

lakpr wrote: Mon Aug 02, 2021 6:58 pm
Vanguard User wrote: Mon Aug 02, 2021 6:11 pm
lakpr wrote: Mon Aug 02, 2021 5:04 am
Vanguard User wrote: Sun Aug 01, 2021 8:09 pm Is it a good idea to withdraw from taxable brokerage account to fully fund Roth IRA at lumpsum?
If you do not have other funds that aren't invested yet, I don't see why not?
What do you mean other funds? I only use FZROX for Roth IRA and my taxable is just VTSAX.

This will also generate a tax event on withdrawal of $6k.
"funds" as in money, not mutual funds. Do you have any other money that is not invested (sitting in a bank account, or expected wages next week/month, etc.) ?

If yes, use THAT money to fully fund the Roth IRA.

If you do not, then go ahead and withdraw the taxable account money and fully fund the Roth IRA. With taxable account, you continue to incur tax cost on future dividends and growth. With Roth you will not any more.

Using Specific ID basis on VTSAX you should be able to find lots that have the highest cost basis (and thus the lowest gains), which can be liquidated at a fairly modest cost.
I have an EF but that’s for just that purpose. I am talking about 2022 as I am $500 away from $6k for 2021 which I will get to this week. I will have to pay taxes in dividends on taxable account but not the profits since I never withdrew anything right?

What is the specific ID for VTSAX?
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ruralavalon
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by ruralavalon »

Invest now in a taxable account. Don't save up to lump sum $6k in January, 2022.

In my opinion it's better to invest wherever you you have extra money available to invest, rather than wait.

Next year invest what you can every pay period in your Roth IRA, and then when the yearly maximum contribution has been reached again invest whenever you have money available for investing in your taxable account.

Don't save up to invest at some future time.

I don't suggest selling fund shares from the taxable account in order to lump sum $6k into the Roth IRA in January.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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slowandsteadywins
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Re: Saving for 2022 Roth IRA lump sum contribution vs. DCA into taxable account now

Post by slowandsteadywins »

ruralavalon wrote: Tue Aug 03, 2021 10:21 am
Thank you!
"Nothing in this world can take the place of persistence; Persistence and determination alone are omnipotent." | -Calvin Coolidge
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