If you read my article over at Seeking Alpha you will notice that several readers suggested I take advantage of various retirement accounts such as the 401k and IRA accounts. You may remember that it wasn’t long ago I was asking the question, “Should I max my 401k?” It seems the consensus was that if I could fund these accounts I should due to the favorable tax efficiency. One reader has developed a nice analysis comparing the benefits of growth in a tax sheltered account versus a taxable one. This model isn’t perfect (what is?), but it did open my eyes to how powerful forestalling the tax liabilities can be when you are growing your wealth. So, I decided to open a Roth IRA.
To be fair I was planning to open a Roth IRA before I wrote the article and had the feedback. It just so happened that my CPA emailed me with the amount I was eligible to fund for 2011: 3,860. Not the full 5,000, but I will take it. Right now the money is sitting in cash and eventually I will purchase a stock with the funds. Many of the companies that I’m looking at are trading at prices that I’m not inclined to pay. I’ll continue to invest in cash until favorable opportunities present themselves.
So, anyone else funding an IRA for 2011 or 2012? If so what stocks or funds do you have in the account?
8 thoughts on “Taking Advantage of The Roth IRA”
In general, non-qualified dividends (such as REITs) and Canadian corps belong in a ROTH.
Most foreign stocks (except Canadian Corps), MLPs, municipal bonds, and treasuries belong in a taxable account. The rest wouldn’t really matter. Some people prefer to put high yielders in their ROTH.
I see you own TEF, best to keep it in your taxable account so you can claim the foreign taxes withheld.
If the Bush tax cuts expire a lot of this changes.
CI— Thanks for the tips. I think many people may adjust their approach to investing if taxes change as much as some people are predicting.
You have to look at your retirement accounts as one big nest egg. Here’s the strategy I use. I don’t plan on ever touching the money in my Roth IRA until retirement. Based on this logic, it makes the most sense to put in my most tax-inefficient funds and/or the funds that will give me the greatest return. Currently, I have 3 years worth of contributions in Vanguard’s Total Market Admiral Fund. It’s made me some good money so far and in 5-10 years if I am way up I’ll be inclined to take money out, if not, no worries, I’ll just be patient and get it when I retire and it’s hopefully recovered.
Thanks for stopping by and sharing your approach! I’m always interested to see what others are doing.
you may want to check with the CPA if you are able to do a non-deductible IRA and recategorize into a Roth (I am fairly positive you can). That way you can get the full $5000 in there, if that is what you were looking to do. I would make as much of a straight contribution as you can and do the non-deductible contribution with anything left, as recategorzing can impact the ordering rules if you do need to take a non-qualified distribution.
Thank you for the suggestion. Honestly I didn’t know about this so I will have to check it out.
I agree that cash should never sit idle. If you have more cash invest it somewhere. I think Roth IRA is a good choice. Better to pay taxes now than after retirement when liabilities increase considerably
I don’t like idle cash either, but for the last three months I have just that. I’m finding that I’m not really a buyer when the market is going up like it has for the past few months. Guilty of market timing? Perhaps, but I’m a patient man and while I continue to research quality companies I will wait for better prices.
Thanks for stopping by!