contribute late 2007 or early 2008???
New to ira’s. Would like to find out if it would be better to invest 4000 for 2007 -Have till april, right?- Or 5000 for 2008 early in January??? Why??? Can you show me the equation/math that proves which is better? Dont have the means to do both. Thanks for your time/advice/help.
Permalink Submitted by David J Chapman, CFP on Thu, 2008-01-03 19:38
Making a contribution for 2007 (even if made in 2008) starts the 5 year clock – so if you only have 5000 total to invest you could onntribute 4000 for 2007 and 1000 for 2008. The IRA would start its clock as if the IRA was set up in January 2007 even thought you did not open or fund until 2008.
Permalink Submitted by Janine Janine on Mon, 2008-01-07 01:46
The sooner you fund TIRA or Roth IRA, the sooner it starts earning gains, or at least, that is the way we all hope our investments work.
Janine
Permalink Submitted by Alan Spross on Mon, 2008-01-07 18:01
Note that the “5 year clock” only affects Roth IRAs, not traditional IRAs. You need to decide which type of IRA is best under your individual circumstances. I agree that if you have 5,000 available for IRAs at this time, you should fund your 2007 IRA first in the amount of 4,000, and that keeps your options open for 2008 for which you have 15 more months to act. The remaining 1,000 can be applied to your 2008 contribution.
You are correct that you have up until 4/15/08 to make your 2007 contribution. With respect to IRA earnings, when dealing with small amounts like an annual regular contribution, you are better off contributing early. If the stock market makes you nervous, you could open the account with a money market investment, and gradually purchase stock or mutual fund shares as the year progresses. This is long term retirement money, so you should allocate your investments properly for your situation and not be distracted by daily, weekly or monthly swings in markets.
Permalink Submitted by Janine Janine on Mon, 2008-01-07 20:18
If the IRA contribution is [b]non[/b]-deductible for current tax income purposes, would it not be prudent to invest in a Roth IRA, which grows tax-free and is not subject to income taxes on withdrawals after age 59 1/2? At least that is the way I feel; consequently, I have funded my son’s Roth IRA yearly, with 2008 maximum of $5000.
Any comments?
Janine
Permalink Submitted by Alan Spross on Mon, 2008-01-07 23:11
Janine,
You are correct. When the choice is between a non deductible TIRA contribution and a Roth, the Roth is always the better choice. Neither gets an up front deduction, but the Roth earns potentially tax free and RMD free, and the TIRA does not.
For a young taxpayer, either a minor or someone in the 15% or lower bracket, the Roth is likewise the best choice even though the young taxpayer may be able qualify for deduction of the TIRA contribution.