UnThreaded | Threaded | Whole Thread (15) | Ignore Thread Prev Thread | Next Thread
Author: Kestrel2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: Contributions to a Roth Date: 9/10/2003 10:39 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I'm looking to start a Roth IRA this year (should have done it a while back, but it's best foot forward at this point.) I am currently diverting all my free cash flow into shoring up my emergency fund, but am planning to fund my Roth for this year with tax refunds and my annual bonus that arrives in March. Do most people try to drop the maximum allowed into the IRA in a lump sum, or monthly? If I could minimize fees I would prefer to break it up into monthly payments (next year) so I wouldn't feel I am leaning on things that could change from year to year (bonus and tax refund.) Since I don't have huge chunks of cash sitting around I would think this would also be safer since I wouldn't be so overextended that I would be tempted to draw back some of my contributions.
Print the post Back To Top
Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37142 of 75383
Subject: Re: Contributions to a Roth Date: 9/11/2003 12:02 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
For predominantly "buy and hold", generally, the earlier the better. I have some money from each paycheck automatically diverted to a savings account, so each January I have already saved up the full legal limit for contributions and I just make one contribution for the new tax year.

Some people contribute monthly or on a per paycheck basis to their Roth IRA--many mutual fund families don't charge a per-transaction fee, so if this is the easiest way to get the money into the Roth IRA, it could make sense.

If one is dealing with a discount broker, one would generally want to make sure that the transaction costs aren't more than about 2% of the amount being invested. Someone else may have to answer about the best approach with a discount broker--I am strictly in funds at the fund families, no transaction costs, but I, like all mutual fund investors, get hit with an expense ratio.

Print the post Back To Top
Author: gogreengo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37143 of 75383
Subject: Re: Contributions to a Roth Date: 9/11/2003 12:14 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
One advantage of contributing monthly is that you can "dollar cost average". You can buy a little bit (of your mutual funds or stocks or bonds or whatever) at whatever the price happens to be that month, and the price will go up and down from month to month. Some months you buy cheap, other months you pay more. But the ups and downs average out. So it's less risky than buying a whole bunch at a certain price, since the price could be high at the time you buy. Make sense?

Print the post Back To Top
Author: Kestrel2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37144 of 75383
Subject: Re: Contributions to a Roth Date: 9/11/2003 12:23 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I might as well include in this thread another option I have. I currently have an outstanding 401k loan at 4.5% interest. I don't have the option to pay ahead on it, or I would have, but the balance is roughly $5000. It's definitely the lowest interest rate debt I have, and paying it off would both get the money into my 401k and compounding, and free up some money each month. However, if I want to pay it off in the first few months of 2004, it would preclude me from putting much or any into my Roth for this year. Which would be the better choice?

Print the post Back To Top
Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37145 of 75383
Subject: Re: Contributions to a Roth Date: 9/11/2003 1:02 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
However, if I want to pay it off in the first few months of 2004, it would preclude me from putting much or any into my Roth for this year. Which would be the better choice?

People rattle off "401(k)" and "Roth IRA" as if they are investments. They aren't! They are account types!

Just what do you have the Roth IRA invested in? If it is (or would be) predominantly stocks, you may be better maximizing your Roth IRA contributions while you can because, once April 15, 2004 has come and gone, you will never be able to make up for missed Tax Year 2003 Roth IRA contributions.

If your Roth IRA is invested in bonds, CDs, or money markets, you may be better off just paying off the 401(k) loan.

Print the post Back To Top
Author: gogreengo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37146 of 75383
Subject: Re: Contributions to a Roth Date: 9/11/2003 11:53 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I would pay back what you owe to the 401k. Then you have a clean slate and don't have that burden on your back anymore. Plus, you're paying 4.5% interest instead of EARNING interest, which is what your money would be doing if it were invested (in a mutual fund or whatever) within your 401k.

Print the post Back To Top
Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37147 of 75383
Subject: Re: Contributions to a Roth Date: 9/11/2003 12:50 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I would pay back what you owe to the 401k. Then you have a clean slate and don't have that burden on your back anymore. Plus, you're paying 4.5% interest instead of EARNING interest, which is what your money would be doing if it were invested (in a mutual fund or whatever) within your 401k.

But isn't most of that 4.5% going back into the 401(k) account? So, instead of earning market returns (or the returns of whatever that money would have been invested in), it is earning 4.5% or close to it from the interest one is paying? If one is paying oneself interest, it sure doesn't sound all that bad.

If that interest was just disappearing to a creditor, I wouldn't be so quick to suggest funding the Roth IRA.

Print the post Back To Top
Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37148 of 75383
Subject: Re: Contributions to a Roth Date: 9/11/2003 12:57 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
gogreengo:

<<<I might as well include in this thread another option I have. I currently have an outstanding 401k loan at 4.5% interest. I don't have the option to pay ahead on it, or I would have, but the balance is roughly $5000. It's definitely the lowest interest rate debt I have, . . . .>>>

"I would pay back what you owe to the 401k. Then you have a clean slate and don't have that burden on your back anymore. Plus, you're paying 4.5% interest instead of EARNING interest, which is what your money would be doing if it were invested (in a mutual fund or whatever) within your 401k."

I respectfully disagree. The OP indicated that the 401-k loan is the lowest interest rate loan that he has. Prepaying low rate loans while higher rate loans are outstanding is not usually a smart finance move (alhtough it can have cash flow benefits or psychological benefits). Without knowing more about the OP's other debts and cash flow, I cannot comment on thes issues.

The biggest downside of 401k loans, IMO, is the typical demand feature upon severance, with the concomittant risk of the loan being deemed a distribution if not repaid within x days of the call. The OP did not give any indication that his loan had this feature.

I suggest that paying 4.5% to himself/herself is better for the OP than paying 7% or 9% or an even higher rate to a third-party lender, especially if 401k loan is not callable upon severance (and the loan does not preclude current contributions).

Just my $0.02. Regards, JAFO



Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: Kestrel2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37149 of 75383
Subject: Re: Contributions to a Roth Date: 9/11/2003 1:06 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I respectfully disagree. The OP indicated that the 401-k loan is the lowest interest rate loan that he has. Prepaying low rate loans while higher rate loans are outstanding is not usually a smart finance move (alhtough it can have cash flow benefits or psychological benefits). Without knowing more about the OP's other debts and cash flow, I cannot comment on thes issues.


To provide a basic summary of where I stand, my existing debt is:

120K mortgage at 5.3% (5/1 arm)
21K HELOC at 6% floating
11K car loan at 8.9%
no CC debt

currently contributing 7 percent to 401k, plus 4 percent employer match (2/3 of up to 6%)
in addition my payback on the 401k loan is roughly another 3 percent contribution, though after-tax, obviously

Up till now I've been aggressively paying down my car loan, but now that's it's at a point where it's worth a good bit more than I owe on it, I'm not paying ahead on it and am instead funneling all my money into shoring up my efund (currently about 5k, immediate goal is 10k.) I net about 3400 a month and am putting 600 into the efund right now. This may change if I move some of that money to aim it towards a Roth (probably will just start out with VFINX.)


Print the post Back To Top
Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37150 of 75383
Subject: Re: Contributions to a Roth Date: 9/11/2003 1:26 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Kestrel2:

JAFO: <<<I respectfully disagree. The OP indicated that the 401-k loan is the lowest interest rate loan that he has. Prepaying low rate loans while higher rate loans are outstanding is not usually a smart finance move (alhtough it can have cash flow benefits or psychological benefits). Without knowing more about the OP's other debts and cash flow, I cannot comment on thes issues.>>>

"To provide a basic summary of where I stand, my existing debt is:

120K mortgage at 5.3% (5/1 arm)
21K HELOC at 6% floating
11K car loan at 8.9%
no CC debt

currently contributing 7 percent to 401k, plus 4 percent employer match (2/3 of up to 6%)
in addition my payback on the 401k loan is roughly another 3 percent contribution, though after-tax, obviously"


Did not mean to make you post your numbers. Also, the 401-k loan repayment is not technically a "contribution", it does not count against annual contribution limits and would not count for purposes of employer match --- although it certainly is in the colloquial sense.

"Up till now I've been aggressively paying down my car loan, but now that's it's at a point where it's worth a good bit more than I owe on it, I'm not paying ahead on it and am instead funneling all my money into shoring up my efund (currently about 5k, immediate goal is 10k.) I net about 3400 a month and am putting 600 into the efund right now. This may change if I move some of that money to aim it towards a Roth (probably will just start out with VFINX.)"

Tome, you seem reasonably on top of things. The 8.9% rate bothers me, personally, but the e-fund is a good goal, too, and the IRA contribution has an annual time limit and no real make-up ability. Lots of defensible choices here and IMO you are within those parameters, FWIW.

Regards, JAFO





Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: IndecisiveFool Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37151 of 75383
Subject: Re: Contributions to a Roth Date: 9/11/2003 2:23 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Do most people try to drop the maximum allowed into the IRA in a lump sum, or monthly?

I contribute the maximum in one lump sum after I finish my tax return.

IF

Print the post Back To Top
Author: IndecisiveFool Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37152 of 75383
Subject: Re: Contributions to a Roth Date: 9/11/2003 2:27 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
One advantage of contributing monthly is that you can "dollar cost average". You can buy a little bit (of your mutual funds or stocks or bonds or whatever) at whatever the price happens to be that month, and the price will go up and down from month to month. Some months you buy cheap, other months you pay more. But the ups and downs average out. So it's less risky than buying a whole bunch at a certain price, since the price could be high at the time you buy. Make sense?

I wouldn't dollar cost average a stock due to transaction costs. For example, $7 trades using Scottrade as a broker would cost you $84 on the year for a maximum $3000 investment if you pull it all in one stock. That's a transaction cost of 2.8% for the yearly investment.

IF

Print the post Back To Top
Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37153 of 75383
Subject: Re: Contributions to a Roth Date: 9/11/2003 3:03 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Do most people try to drop the maximum allowed into the IRA in a lump sum, or monthly?

I don't qualify but I encouraged my daughter to contribute monthly because it's easier for her to budget for it that way. It goes to SCottrade monthly but I don't buy something every month.

rad

Print the post Back To Top
Author: PanemetCircenses Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37154 of 75383
Subject: Re: Contributions to a Roth Date: 9/11/2003 4:17 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I contribute the maximum in one lump sum after I finish my tax return.

I contribute in lump sum on January 2-4 (depending on which day of the week New Year's Day falls), the earliest day on which contributions can be made. (The broker I use, TD Waterhouse, has a branch location local to me.)

--B+C

Print the post Back To Top
Author: Lucchetti One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37160 of 75383
Subject: Re: Contributions to a Roth Date: 9/12/2003 6:14 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Kestrel2 wrote:
... my existing debt is: ... 11K car loan at 8.9% ... at a point where it's worth a good bit more than I owe on it ...

Admittedly, I'm not a big fan of borrowing that kind of money to buy a car, but at least you're not upside-down on the loan. However, I have to agree with JAFO31; the rate seems unnecessarily high. Strictly from a debt-management standpoint, perhaps you could look into refinancing this loan? (Yes, it is possible to refinance car loans.) As with any refinance, just make sure the cost (if any) of the process is reasonable compared to amount of money you will save with the lower rate.

--L

Print the post Back To Top
UnThreaded | Threaded | Whole Thread (15) | Ignore Thread Prev Thread | Next Thread
Advertisement