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Where to keep money for future backdoor Roth contributions?

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  • Avatar emfool 
    Participant
    Status: Physician
    Posts: 2
    Joined: 03/11/2018

    We have been storing around $3000 each quarter in an Ally account, so that in January of the following year we can fund backdoor Roth IRAs.

    I’m wondering if anybody would suggest putting this same amount of money into a taxable brokerage account instead, since it’s being invested anyway, then withdrawing it the next year to fund the Roth. Taking the risk of some loss, of course.

    Anybody else do this, or have a smarter strategy?

     

    #205653 Reply
    Avatar JBME 
    Participant
    Status: Spouse
    Posts: 571
    Joined: 03/26/2018

    I assume you have an emergency fund? Here’s what I’d do….yes, this isn’t an emergency and you don’t want to justify using emergency funds for non-emergency purposes. But why don’t you just, on jan 1, take $12k out of your emergency fund for the Roth IRA contributions and then through the year rebuild the emergency fund to the pre-roth contribution levels?

    #205664 Reply
    Liked by Craigy
    jhenry jhenry 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 14
    Joined: 03/26/2019

    I think putting it in your Ally Financial Savings account is a fine idea. With a shortened time horizon and stocks having a high 1 year standard deviation (about 20% for large caps), I would stay away from stocks and bond funds.

    However, buying defined maturity bond ETFs holding investment grade corporate bonds maturing later in the year (e.g. Dec 2019 like iShares $IBDK) is not a bad idea so long as you hold them maturity. The defined maturity bond ETFs if held to maturity help reduce interest rate risk associated with other bond funds. However, the Ally Financial Savings account is also not a bad idea.

    Joshua Henry, Meridian Financial Advisory ~ [email protected]
    https://www.meridianfinancialadvisory.com/

    #205670 Reply
    Avatar FIREshrink 
    Participant
    Status: Physician
    Posts: 1035
    Joined: 01/11/2017

    By leaving it in cash for a year you lose an expected return of ten percent. Why wouldn’t you invest it right away?

    All of your money should be invested right away …

    #205673 Reply
    Liked by Craigy
    Craigy Craigy 
    Participant
    Status: Spouse
    Posts: 2111
    Joined: 09/16/2016

    Imo you’re overthinking this.

    Just cash flow it.

    LEVEL 1 WCI FORUM MEMBER.

    #205677 Reply
    Liked by MPMD, ENT Doc
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4695
    Joined: 01/08/2016

    or have a smarter strategy?

    Click to expand…

    yes.

    all extra money you have gets invested.

    you then spend from your efund. every jan 2nd i move (now) 12K into the rIRAs. no excess cash has to wait.

    then you use the ongoing cashflow to re-fill the efund.

     

    no extra cash sitting.

    #205681 Reply
    Liked by Craigy, JBME
    jhenry jhenry 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 14
    Joined: 03/26/2019

    I guess your real investment horizon is not at the point you fund the backdoor Roth, but your retirement. Thus, it would be appropriate to buy risk securities (stocks/bonds) now in the same allocations you will have in your Roth.

    Joshua Henry, Meridian Financial Advisory ~ [email protected]
    https://www.meridianfinancialadvisory.com/

    #205690 Reply
    Hank Hank 
    Moderator
    Status: Attorney
    Posts: 1471
    Joined: 03/27/2017

    Disagree that it should be the same asset allocation as the Roth. Riskier, higher potential return assets go in the Roth. Foreign goes in taxable for the foreign income tax credit.

    #206167 Reply
    MPMD MPMD 
    Participant
    Status: Physician
    Posts: 2608
    Joined: 05/01/2017

    or have a smarter strategy?

    Click to expand…

    yes.

    all extra money you have gets invested.

    you then spend from your efund. every jan 2nd i move (now) 12K into the rIRAs. no excess cash has to wait.

    then you use the ongoing cashflow to re-fill the efund.

     

    no extra cash sitting.

    Click to expand…

    that’s what we do.

    ideally you want to get to a point where cash flowing a $12k expense is a pretty trivial event.

    #206172 Reply
    Liked by MaxPower
    jhenry jhenry 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 14
    Joined: 03/26/2019

    I was saying whatever intentions (ie allocations) he has for the Roth (yes, it should be growth assets preferably), it would be ok to put money he plans to invest in that Roth in 1 year or less into a taxable account in similar growth securities which would be sold in the taxable acct, then repurchased in the Roth being careful to avoid wash sales.

    This strategy entails extra work and would have tax implications but an extra year of market exposure would have benefits.

    Joshua Henry, Meridian Financial Advisory ~ [email protected]
    https://www.meridianfinancialadvisory.com/

    #206175 Reply
    Avatar ZZZ 
    Participant
    Status: Spouse
    Posts: 730
    Joined: 06/18/2018
    put money he plans to invest in that Roth in 1 year or less into a taxable account in similar growth securities which would be sold in the taxable acct, then repurchased in the Roth being careful to avoid wash sales

    Click to expand…

    You get paid to give financial advice?

    Just cash flow it. OP is presumably an ER doc. Shouldn’t have to realize capital gains (likely incurring tax, offsetting a big benefit of doing the bdRoth) to come up with 12k in January.

    #206176 Reply
    jhenry jhenry 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 14
    Joined: 03/26/2019

    put money he plans to invest in that Roth in 1 year or less into a taxable account in similar growth securities which would be sold in the taxable acct, then repurchased in the Roth being careful to avoid wash sales

    Click to expand…

    You get paid to give financial advice?

    Just cash flow it. OP is presumably an ER doc. Shouldn’t have to realize capital gains (likely incurring tax, offsetting a big benefit of doing the bdRoth) to come up with 12k in January.

    Click to expand…

    Cash flowing it is a fine idea (probably best—-it’s what I would recommend), but I was just discussing an alternative. Expected 1 year return of $SPY net of taxes is still higher than alternatives.

    Joshua Henry, Meridian Financial Advisory ~ [email protected]eridianfinancialadvisory.com
    https://www.meridianfinancialadvisory.com/

    #206177 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8366
    Joined: 01/09/2016

    100% disagree with @jhenry. Impo, investing money you will need within the next 5 years is a huge no-no. You might as well take it to Vegas – at least, you’ll get free drinks.

    Over the long term, you can expect to earn 8% to 12% on equities invested in an appropriately diversified and rebalanced portfolio (annually is my preference) on average, but no way can you predict returns in the short term.

    You cannot make an “in-kind” contribution to a Roth IRA (transferring the investments to the Roth). You would have to liquidate and invest the cash. For one year of potential earnings on $5,500, it would be ill-advised to take the risk. Again, impo.

    Johanna Fox Turner, CPA, CFP: I am not your financial advisor; any responses are for general purposes only
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #206179 Reply
    jhenry jhenry 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 14
    Joined: 03/26/2019

    100% disagree with @jhenry. Impo, investing money you will need within the next 5 years is a huge no-no. You might as well take it to Vegas – at least, you’ll get free drinks.

    Over the long term, you can expect to earn 8% to 12% on equities invested in an appropriately diversified and rebalanced portfolio (annually is my preference) on average, but no way can you predict returns in the short term.

    You cannot make an “in-kind” contribution to a Roth IRA (transferring the investments to the Roth). You would have to liquidate and invest the cash. For one year of potential earnings on $5,500, it would be ill-advised to take the risk. Again, impo.

    Click to expand…

    Hi jfoxcpacfp, I understand that investment horizon is everything due to large 1 year standard deviation (20% +/-). I was only trying to say 1 year wasn’t the way to look at the investment horizon if liquidated and reinvest cash.   For the reason you said (“For one year of potential earnings on $5,500, it would be ill-advised to take the risk. Again, impo.”), I too would not advise the strategy. In other words, I agree with your advice @jfoxcpacfp.

    Joshua Henry, Meridian Financial Advisory ~ [email protected]
    https://www.meridianfinancialadvisory.com/

    #206194 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8366
    Joined: 01/09/2016

    100% disagree with @jhenry. Impo, investing money you will need within the next 5 years is a huge no-no. You might as well take it to Vegas – at least, you’ll get free drinks.

    Over the long term, you can expect to earn 8% to 12% on equities invested in an appropriately diversified and rebalanced portfolio (annually is my preference) on average, but no way can you predict returns in the short term.

    You cannot make an “in-kind” contribution to a Roth IRA (transferring the investments to the Roth). You would have to liquidate and invest the cash. For one year of potential earnings on $5,500, it would be ill-advised to take the risk. Again, impo.

    Click to expand…

    Hi jfoxcpacfp, I understand that investment horizon is everything due to large 1 year standard deviation (20% +/-). I was only trying to say 1 year wasn’t the way to look at the investment horizon if liquidated and reinvest cash.   For the reason you said (“For one year of potential earnings on $5,500, it would be ill-advised to take the risk. Again, impo.”), I too would not advise the strategy. In other words, I agree with your advice @jfoxcpacfp.

    Click to expand…

    With all due respect, I think it might be helpful to work on your communications skills:

    I was saying whatever intentions (ie allocations) he has for the Roth (yes, it should be growth assets preferably), it would be ok to put money he plans to invest in that Roth in 1 year or less into a taxable account in similar growth securities which would be sold in the taxable acct, then repurchased in the Roth being careful to avoid wash sales.

    This strategy entails extra work and would have tax implications but an extra year of market exposure would have benefits.

    Click to expand…

    WTH?

    Johanna Fox Turner, CPA, CFP: I am not your financial advisor; any responses are for general purposes only
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #206195 Reply
    Liked by MPMD, Lordosis

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