Have You Maxed Out Your Roth IRA This Year Yet?

by David@MoneyNing.com · 32 comments


You think I’m just joking, but retirement is no laughing matter unless you already accumulated millions and retired early (in which case you can laugh out loud 24/7). I think everybody should max out their Roth IRA, right now.

Here’s why.

The Cost of Delaying

I know so many people who wait until the end of the year (some even wait until April the following year) to max out their Roth IRA. They wait, then they deposit the full $5,000 into the account. Why? Losing a year of tax free gains is the same as saying no when the cashier offers you a 15% off coupon to use on your purchase. Maybe you don’t need the money, but it’s a fool’s choice no doubt.

There are many theories of how much money a decision like this costs but it doesn’t matter. Money is money, big or small.

Okay I’m Convinced, But This is Only Possible If I’m Rich

You don’t have to be rich. All you have to do is move $5,000 of your emergency funds into the Roth IRA now.


I know. This sounds like dumb advice, but did you know that you can withdraw all of your Roth IRA contributions? Since you won’t be contributing to your Roth IRA if you actually need the funds in an emergency, you can safely assume that it will be the same thing as withdrawing it if you need it.

Investments Could Fall in Value

The caveat is that your investments could tank at the time when you need the money the most. This might happen, but I suspect that if you’ve been reading MoneyNing for a while, you are responsible enough and this worry will motivate you to save more. If you end up spending less until you save that emergency funds back up to a comfortable level, that’s just side benefit.

A Little About Emergency Funds

I always think the conventional idea of an emergency fund, while great, is a little too conservative. If ultimate safety gives you the piece of mind and confidence to take more risks elsewhere (example: career), then great. If not, then perhaps there’s a slightly better way to use your money.

Automatic Works Too

Some people also contribute to their retirement accounts via the automatic method. If this is you, ignore this as you are doing just fine. Automatic contributions have other benefits so I won’t change anything (that’s the whole point of setting it on auto pilot anyway).

Your Turn

I understand this is one of those “sounds interesting but this is not for me” type strategy, but what do you think?

If there are any holes with using the emergency funds this way, please point them out for everyone’s benefit.

I look forward to hearing your thoughts.

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{ read the comments below or add one }

  • Chrissy S. says:

    I am no where near maxing out my Roth IRA. I just opened it about 8 months ago. But, I do want to contribute today, before the April deadline. I HAVE already filed my taxes though, so I’m not sure that makes a difference…my question is..is it better or smarter to apply my $500 contribution that I want to put in today to the 2011 tax year or to the 2012 tax year?

    Thanks for your help!

    • MoneyNing says:

      In a performance standpoint, electing to have the contribution as 2011 or 2012 won’t matter. However, since the option to use 2011 amounts will expire come April, you might want to use that first and hopefully you will have the maximum amount to contribution in 2012.

  • Michael says:

    Opps, I’m sorry my wife and I were laughing at the post and the idea of having 5K to use this way and then my wife pointed out that this was a linked article to the one called “5 Ways to Help Your Children Become Wealthy” so again I apologize for the rant! I still think people with money don’t need advise on saving it or investing it!

    • MoneyNing says:

      No worries about the rant. Everyone is welcomed to their own opinion but have you thought about how you can come up with $5k eventually? You found a way to get online. Is the cost and time really necessary? How about a cell phone? Do you really need that to survive? Do you have a TV subscription too? If you really scrutinize your expenses, you will probably find that other than perhaps basic food, nothing else is really a necessity.

      Too many people give reasons why they don’t save for retirement, and most of the time (at least for practically everybody living in a developed society) it turns out that they are just choosing not to put money towards their future. You chose to go online like everybody else does instead of putting money towards your retirement. You chose to surf the web instead of trying everything you can for additional income. You chose to live a little now by trading off a more financially stable future.

      And by the way, those are fine choices. Just know that you did choose, subconsciously or not.

  • Michael says:

    I’m a father of two a 13yr old and a 7 month old, money management is a big concern I have for them. I’m 44 with no 401k no retirement no savings not to mention no 5k I can just transfer over to a IRA. Needless to say the thought of advising my children on how to become wealthy caught my eye. However after reading this I realized it wasn’t meant for low income families. Pfft Sorry 5K, 5 grand, 5 thousand dollars, $5,000? Yea hold on I’ll just transfer that from my want pile to my wish pile. Do you live in America? Sorry for the rant! I don’t see the point in offering money advise to people who have it, they don’t need advise obviously!~LOL

    • Courtney says:

      No no no! I’m poor too! But what they’re talking about is maxing out their Roths. 5K is the max limit you can contribute per year – not the minimum or even the standard! You absolutely don’t have to put $5,000 in it if you don’t want to or can’t!

  • Stan says:

    I’m close to retirement (it could be like tomorrow if I want). I’m currently debating whether I should fund my roth IRA or pay down the mortgage with less than 5 years. Interest from the mortgage is not worth the tax savings at this point in time. The emergency fund is there as well. What do you think?

  • Alex Roth says:

    T. Rowe Price is a great option… and fidelity offers some great plan

  • ANonyMouse says:

    What if you have a bank-based Roth IRA that only allows you to contribute to it once every year (say it’s pretty much a CD but w/ Roth IRA benifits?)

  • Ryan Roth says:

    I’m still surprised how many of my friends don’t take the time to invest in a Roth IRA when it’s so simple to set up. Literally takes 5 minutes online and is something that’ll continuously make money without you doing work… why not?

  • Financial Samurai says:

    Oh, no. I really hope nobody converts to a ROTH IRA or believes in the hype. We’ve got like a 50+ commented post over on my site why converting to a ROTH is a government trick.

    Contributing is better than not contributing, but you’ve got to understand the process before you do.

  • Ben says:

    I’m going to have to disagree with this the whole “cost of waiting until April”. Some brokerages will start making bonus offers in February and March to open up an IRA with them. Also, not everyone has 5k lying around to dump in one of these so tax return time is helpful for rounding up the funds. Now you can make the argument that people should not be giving the IRS an interest free loan by claiming more deductions or what not . . but tax forms ARE intimidating to normal people. In any case, so long as they are making regular contributions, the majority of people don’t need to rush into their 2011 contributions like money is going down the drain and that’s if you plan on living that long.

    • Phillip says:

      Well, it’s pretty strtrghafoiward: whatever the $41,000 was used to purchase must be the amount recharacterized (if the entire conversion is to be recharacterized). The rule is that the amount that you recharacterize is equal to the amount converted, plus any capital growth, interest, or dividends, and minus any expenses and capital loss associated with the amount.You should be able to follow the money via your statements, I would imagine. Hopefully the investment activity hasn’t been too wild to piece this all together.Hope this helps -jb

  • JoeTaxpayer says:

    MN – curious, how much do you expect to have in your pre-tax retirement accounts right at retirement? Over $2M in today’s dollars? more/less?
    It would take a retiree that much today to withdraw enough to bump toward the top of the 15% bracket. So anyone in the 25% bracket today should hold steady and go pre-tax 401(k) or IRA. If you’re in the 15% bracket right now, I have no issue with the Roth.
    A real shame to convert money now, pay 25%, and find you retire in the 10/15% brackets. I see a lot of Roth Mania ™ but little caution.

    • MoneyNing says:

      I assume you mean how much people should have in their retirement account, as opposed to how much I expect that my individual circumstances will allow me to accumulate.

      I believe most people can live VERY comfortably with $30,000 per person in today’s dollars without debt, even if one includes many luxuries. If you look at it that way ($60,000 a year for couples), and using the 4% withdrawal theory, then having $1.5 million is more than enough even if your money doesn’t grow.

      Of course, if you are comfortable with more risks, I think $1 million is fine too in today’s dollars, because I assume by then, that person will own their own home outright and will be in some investments that will grow, even if it’s just for a little bit a year.

      • JoeTaxpayer says:

        You post started with a presumption of Roth = Good. I am only trying to make a point. If one retired today, no pension, no other income, it would take over $2M to fill the 15% bracket. As inflation impacts the tax brackets themselves, along with the standard deduction and exemption amounts, it’s not fair to say that since one sees $3M in their account in 30 years that puts them in a higher bracket. Looking forward you’d have to adjust for inflation. If people who are now in the 15% bracket wish to save in a Roth or convert to ‘top off’ that 15% bracket, I have little objection, but those the ’10 law applies to (earning $100K) are the very people who shouldn’t be using Roth in the first place.

        • MoneyNing says:

          You are right, and I always truly appreciate everyone’s point of view. This post definitely already assumed that Roth IRA is good.

          I like the Roth IRA more than a Traditional IRA (since you are implying this comparison instead of whether retirement accounts are better than taxable accounts) because I think having a large 401k artificially inflates someone’s “outlook” of how much they really have. To me, the numbers is such a small part of personal finance when compared to psychological side of things, thus why I talk about it much more than anything else over here.

          For example, while no one got rich with ONLY savings accounts, these conservative people usually have no debt and are doing just fine. That’s mainly why I like Roth, because it gives you a truer picture of what you actually have.

          No one really knows what the tax code will be decades down the road, and unpredictability is a HUGE obstacle to someone’s piece of mind during retirement.

          Roth money = taxed money = my money

          401k = my money – Uncle Sam’s money (a much different beast).

      • marci says:

        One can live very comfortably on under $20,000 – as you know I am living proof of it…. And my retirement magic number is only $200,000. But – then I am debt free, and will have SS, a small pension of $50/mo, PERS, and I’m working on a 2nd small pension, plus my traditional IRA’s…. Actually, in retirement, the income will be way more than the $20,000 – closer to $$25,000 – so I will actually have plenty – even allowing for inflation, compared to what I am living on today. (which allows for that pesky medicare payment I’ll have to make 🙂 )

        I just think one needs to take into account all the other savings/IRA, 401K, pension, SS, etc… and then figure out how much more one needs over that (if any )

  • Jessica Roth says:

    I don’t know if 6-12 mo of savings is such a big exaggeration as someone mentioned. In this economy, 2-3 years would be make me more comfortable.

  • Ryan says:

    I’ve been contributing to a Roth ever since I was working as a teenager. I think its an absolutely fantastic retirement account, especially great for those that start contributing at a young age. And, I completely agree with maxing it out at the beginning of the year, even if you are reducing your emergency fund a bit. very sound advice.

  • Don@Moneyreasons says:

    I wish I could. We get too tight financially at the end of the year, with Xmas, 2 December birthdays, and usually a winter vacation (this year was Disney).

    For my family, we won’t be able to put the full $5,000 into a Roth Ira until mid summer…

    Sounds like a great idea though, I think I will do it that way next year. I won’t have any debt at the end of next month (Feb), so that will make it easier…

  • CD Phi says:

    I agree. Why delay when there are benefits to be made from planning ahead? I think Roth IRA is a great investment.

  • Craig says:

    Yes I have, I have no 401k so made it my job to set up a Roth IRA and have automatic transfers each month.

  • marci says:

    1. Once you are financially set up, having an emergency account is no longer a necessity – as you can “borrow” from one of your other accounts. While I have investments, some are more liquid than others, and those are available if I need them for emergencies. And whatever the situation, I only need $400-$450/month for bare basics, (utilities, groceries, car/house insurance, and property taxes, meds) so it’s pretty easy for me to get by 🙂

    2. My tax man advised me against a Roth and advised me to continue with the traditional IRA – which is what makes financial sense in my situation. It’s a matter of what works in each individual’s own personal situation.

  • Mike Piper says:

    I did this while I was in school. I’d max out my Roth and put it in something with very low volatility (usually a short-term US Treasury index fund). Then if I needed the money, I could tap it without having to worry about taxes, penalties, or the money not being there.

    Once I knew for sure that I wouldn’t need the money, I moved it into other, higher-risk investments.

    • MoneyNing says:

      Wow I wish I was smart enough to think about money so much in school. I guess I’m still early on average but another 10 years head start would have been sweet 🙂

      • Mike Piper says:

        I take no credit. My older brother made me do it. 🙂

        He took me to a Scottrade office and told me to write them a check for $3,000.

  • Laura says:

    I like it. I think I make this my goal for Jan 2010 to max out my 2011… I can start planning now.

  • Mark says:

    Over a 30-year period, delaying roth IRA contributions til end of year will cost you over $100,000. Good tip, thanks.

  • Daniel says:

    I think 6-12 months of expenses is a little extreme for an emergency fund, especially if you hae a Roth IRA. Why not put it in (and keep it in if things stay good) and in a real emergency take it out? It shouldn’t be TOO accessible or you may be temped to do it. I’m going to take a temporary hit to my savings account and start that Roth IRA (instead of continuing to contribute to my Roth 401k. It will serve as a backup emergency fund, although I hope to keep it as a retirement savings account and not have to withdraw anything from it.

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