Contributing to Last Year’s Roth IRA
Kyle and I have deviated from our normal Roth IRA contribution setup. Our normal routine is to each make bimonthly contributions (working out to about once per week between the two of us) to our Roth IRAs and make additional contributions when we receive extra paychecks. Despite my intense desire to max out both our Roth IRAs, we were several hundred dollars short of maxing out our 2012 contribution at year’s end. In previous years we would have just gone on as normal making our contributions since we had no immediate plans to try to max out.
However, since Kyle will be graduating in 2013 and increasing his income substantially, we think there is a distinct possibility that we could max out our Roths in 2013 – or save even more. Since my account had the contribution room left under 2012, we decided to switch my regularly scheduled contributions in these first couple months of 2013 to be categorized under 2012 instead (which you can do until April 15) until our 2012 contribution is maximized. We don’t yet know if Kyle will have access to a 401(k) at his postdoc so we may need all the contribution room we can find in our IRAs once we get that income boost to keep up our desired savings rate.
While we’ve never done this in the past, it really just seems like a bookkeeping change, not one that actually affects our investments. Our bimonthly contributions are going into the same fund as always on the same schedule for now so we are still dollar cost averaging as we like/have to – we’re not trying to time the market or anything. It will be straightforward to increase our contributions when Kyle starts his new job and the income we anticipate is realized.
I contacted Vanguard about whether or not my contribution would automatically switch back to being under this year when I met last year’s contribution limit. They said that the account wouldn’t allow me to over-contribute under last year but wouldn’t automatically continue the contribution under this year. I’ll have to manually buy the remainder of the individual contribution in which we meet the limit and then set up a new recurring contribution for the next installment.
This whole process has made me question whether we should have been doing this all along – well, whether I should have, as Kyle has maxed out his Roth IRA each year for several years now. Should I have had contribution room snowballing for several years now, to the sum possible to fit in between Jan 1 and Apr 15 with our savings rate each year, waiting for that year when we can max out the current year as well as the room left from previous years?
Are or did you contribute to last year’s retirement income this year? Do you vary your contributions throughout the year or keep them steady? Have you tried to snowball contribution room over multiple years?
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Filed under: retirement · Tags: 2012, 2013, retirement savings, Roth IRA
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We don’t snowball (we max it out every year), but we do set money aside throughout the year and usually deposit it all in one big chunk between Jan and April for the previous year. Doing this has allowed us flexibility so we could have more cash on hand to make other investments, and this year we found out that we were dangerously close to the income phase-out levels, so it would have been a PITA if we had deposited early only to be ineligible.
I haven’t heard of that approach before but I can see how it’s advantageous if your income is flirting with the contribution limit line. You probably could contribute a non-max amount monthly since it would only be phased out, not stopped abruptly, yes? But if you like the cash accessible that is another great reason to use the prior year’s contribution room.
The phase out is actually pretty abrupt, especially for a married couple. (Hooray for marriage penalties!).
It starts to phase out at $173K and by $183K you’re not allowed to contribute at all. Weird as it sounds, that swing could be made in Mr PoP’s job in a day. Not everyday – that’s be crazy! But if a bonus gets announced and Mr PoP can line his clients up right, he can make $10K more than if he had just sold them stuff when there wasn’t a bonus available. Weird, right ? But that’s our reality.
That is much more abrupt than I would have thought!
Not trying to hi-jack here, but if you had reached the phase out would you have done the backdoor ROTH option?
I think you mean the alternate option our accountant mentioned. Not clear on the details, but I think it was making a deposit into a traditional IRA and then immediately rolling it into a Roth?
It was definitely on the table as an option since we were so close to the limit.
I just did something like this as well. The problem I have run into this year is that the custodians tax forms are mailed to you in Jan/Feb so don’t include the correct amounts (for the amounts you have put in after Jan 1st). As long as you are tracking the amount and/or can get info from your custodian it probably isn’t a big deal as the IRS just wants to check your contribution amounts vs your eligability – but I do like having an official form early in the year so I can do my taxes correctly.
In any case I would probably advise you to wait to file your taxes until you have the complete amount you want to contribute in your IRA so you can correctly report these numbers to the IRS.
I don’t think we report our Roth savings to the IRS at all, actually. Since it’s Roth we aren’t reducing our tax burden and since we are students we aren’t eligible for the saver’s credit. And our income is nowhere near non-eligibility. Anything I missed?
Good call on that. So I use tax software (H&R Block) to help with my taxes (saves me a good bit of work for rental property/business income), but apparently it also decreases my knowledge level of the actual underlying forms.
I looked into this some more and while the software asks for your Form 5498 IRA contributions, both deductable (normal IRA) and non-deductable (normal IRA and ROTH IRA), and IRA conversions. My guess is that it is simply doing the calculation of whether you exceeded your allowable contributions based on your income level. As I looked into it more it appears that your custodian is required to send a Form 5498 to the IRS detailing all your contributions for the prior year. So they have a record for it as well.
You do have to list conversions on your tax form as well as pay penalties on any excess IRA contributions (unless you un-contribue them before you file), so it is still important to track how much you have contributed, but you just don’t need the official Form 5498.
I didn’t know about Form 5498 but I’m glad the IRS is apprised of my savings rates. Our IRAs are housed at one brokerage firm so it’s easy for us to check the balances whenever so I’m not concerned about forms being less updated for contributions post-December. This is probably the only year we’ll do this catch-up in the forseeable future, too.
Assuming your goal is to max things out, I think it makes sense to contribute to the previous year first if you still haven’t met the limit yet before the tax cutoff date. This preserves your option of being able to contribute the max for both years if you have the money. There is no downside if you aren’t able to max everything out. However, this could all get a lot trickier if your income is going to change radically soon. In that case, you might have a preference for the contributions going to one tax year or the other, or for whether you’d prefer Roth or traditional for a given year.
Our income won’t be skyrocketing this year, just up about $10-15k/yr but only for part of the year. We’ll be in the 15% tax bracket for a couple more years.
That’s exciting news about being able to max out for 2013!
I made a $200 payment this month to max out my 2012. I have auto-debits for $400/month throughout the year, and I make the last $200 payment in Jan/Feb of the next year. I will have to up my monthly contribution this year though because of the increased caps for contributions…wahoo!
That’s a nice round monthly savings rate for the Roth. We save, like, $786.66/month, oh well. 🙂
2012 was the first year we made a contribution to our ROTH. Well, I opened my ROTH IRA, and invested $3,000.
Since the cut off date to invest for the 2012 year is April 15th, I might end up investing a little more into a ROTH and put it under 2012. That way in 2013 we still have a chance to invest.
It will depend on how much my bonus is in late March/early April.
We are looking at buying a house in 2013 and need to have $30K plus another $10K for additional expenses, plus a $10K emergency fund. Lots of financial goals this year!
Yay, goals! So you’ll be trying to make a Roth investment within a couple weeks of the deadline for last year?
I’ve never heard of the snowball method but it seems like a sound approach. Its always good to use up the previous years cap before contributing to the current year. This would have helped me last year. I contributed to my 2012 ira even though I could have contributed to 2011 which had $0 in it.
I guess I just made it up (?) so that’s why you haven’t heard of it. I doubt many people have the problem of not being ABLE to max out an IRA once they decide to contribute at all!
I do steady payments throughout the year, with an automatic transfer on the first of the month. When I’m working, money gets deposited weekly from my paycheck into the checking account the funds are drawn from, but when I’m not working, I only have 2 deposits, money moved from the joint account where my unemployment goes, and the money order I buy with the prepaid debit card that my funds from donating plasma are deposited.
I didn’t quite understand – do you contribute at the same rate throughout the year whether or not you are employed full-time?
Sorry if that wasn’t confusing. Yes, I contribute at the same rate throughout the year unless money gets just too tight to afford it. That hasn’t happened in a couple years now, though. The point I was trying to make was that I don’t make my contributions more frequently than that because in the winter, I basically don’t get paid more frequently than that.
We only get paid monthly as well. I used to contribute monthly but Kyle contributed weekly for more DCA-ing. Since it was driving me crazy to reconcile his weekly contributions with our monthly budget, he agreed to switch to bimonthly if we each contributed on alternate weeks so it works out to almost weekly.
I always do the IRA in a lump sum, and I always do the previous year before starting the next year. I save the money separately and at tax time I generally know if we have enough surplus. Some years I do them early and some years we’ve done them late– it’s all based on what our cashflows and incomes are like.
Wow, we’ve been doing IRAs for 13 years now. Though I do not max out all of my tax-deferred savings opportunities because I have a lot more room at work than what I’m using now.
Have there been years in the last 13 when you’ve contributed less than you expected to and you were glad you saved making the contribution for the following year?
We’ve maxed it out every year, though some years were touch and go until the end, meaning we made the contribution after doing our taxes and figuring out our liability (we almost never get refunds and almost always have had to do estimated taxes). When times were good we’d do two years at once in that three month window. Usually we aim for October or September (as that’s historically been a good time to enter the market and it lines up with academic paychecks).
I honestly had never considered that the IRA ending in January rather than April, so starting a new one while the old one was still open seems odd to me.
This year we’re going to put off 2013 contributions because DH might push us over the limit or he might make nothing at all. We’ll find out!
We’re currently behind on our retirement goals. Until our credit card debt is paid off we’ve decided not to contribute to an IRA. However, we hope to have the debt paid off by Oct. After that we’ll contribute for 2013 up until Apr 15 of 2014. It’ll be a stretch, but I’d like to max out our IRAs for both years and continue.
That sounds like a good plan – good luck saving enough for the 2013 contribution in those few months.
I just invested to both my wife and my Roth IRA. This year, I also did a SEP IRA for 2012 based on my self-employment income. Very exciting!
Sweet! Were you saving up that money starting in last year or did you cash flow it this year?
Like nicoleandmaggie, we contribute to our Roth usually in a lump sum (or a few lump sums) throughout the year. Our income/expenses are less stable month-to-month basis (because of side income, changing income from semester to semester, air fare purchases, bulk food purchases, etc), so it makes sense for us to do it this way. Last fall I wasn’t sure if we were going to be able to max out both of our Roth IRAs as well as pay N’s health insurance (due in Jan) and pay off N’s final student loans (due in Feb)–our top priorities. After paying those items, we looked at our finances and were able to contribute the last few $k to hit our max for 2012. Sure feels good, doesn’t it?
I think if you set aside monthly contributions and you start “back-paying” for 2012 during 2013, you might end up falling into this schedule in future years–which is fine, but worth recognizing. The monthly payment mode isn’t the case for us right now, so I don’t feel “behind” in 2013 knowing that we contributed during this calendar year to our 2012 amount.
I really like that you prioritized your expenses last fall and that maxing out retirement made it onto the list after all!
I don’t think I will mind if we don’t max out in 2013 because there is an even better chance we’ll be able to in 2014 and we can save up even more contribution room. In 2015 we might get phased out, though.
Great call going back and picking up the rest of 2012. While it’s manually a pain in the butt, I think this is so, so worth it. I have to do this with my SEPP every year. It’s an 11th hour decision whether I can stuff more money in or not.
Do you ever reach the contribution limit for your SEP?
Last year I paid by-weekly into my Roth 401(k). Now that I am self employed this year, it will definitely be an adjustment since I don’t know how much I will bring in each month. As of right now, I think we will shoot for investing quarterly.
I think assessing your self-employment income for your savings goals quarterly makes a lot of sense – I think that’s even what I recommended in my irregular income post. 🙂
For our 401k we contribute throughout the year, but IRAs we do lump sum. Later part of last year and this year we have stopped almost all retirement contribution to funnel everything into a down payment account. So we are way behind our retirement this year which probably means I will increase the contribution significantly after we buy a house (hopefully by mid-year). If I make enough I am planing to make it up by opening a SEP IRA or a solo 401k and contributing a lump sum later this year or early next.
As I understand it, those contribution limits are way higher than those of IRAs so you should be able to make up the ground quickly. Good luck finishing up your down payment savings!
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