How can I contribute to my IRAs as soon as possible?

March 5, 2008 6:19 PM

How can I contribute to my IRAs as soon as possible?

For tax year X, you are allowed to donate to IRAs at any point between January 1, X, and tax day, X+1. I would like to donate as soon as possible (January 1, X), and I generally have sufficient funds to do so. However, I do not do so - I am held back by my limited understanding of tax law.

I have three different IRA accounts: one that I've made Roth contributions to, one that I've made traditional deductible contributions to, and one that I've made traditional nondeductible contributions to.

My financial situation is, has been, and likely will be such that it is never entirely clear how much I will be allowed to contribute for each type of IRA, until my taxes are actually done. So, I never know how much to put into each account until I do my taxes.

This causes me to essentially lose a year (and more) of tax-friendly growth from every contribution, every year.

Is there a way that I can legally, easily, and safely get around this problem, and actually donate on January 1 of every year for that tax year?

For example, I think the best would be if I could just have a single IRA account that is allowed to hold all three types of contributions. If that's possible, then I could just dump the max in on January 1 of year X, and (just as I do today) figure out and report the exact breakdown when I do my taxes for year X in year X+1.

Or perhaps there's a way to move excessive contributions of an account of one type to an account of another type, without penalty? Again, then I could just dump in the max to one account on Jan. 1, year X, figure out the breakdown while doing taxes in year X+1, and then actually move funds between IRA accounts to make up for the difference.

In that case, though, what if I had, say, purchased stocks with the funds in the meantime? Do I move a number of shares that, in cost basis, corresponds to the amount I'm adjusting by? Or is it more complex?

Any information, suggestions, or advice on this would be appreciated. Thanks.

posted by Flunkie to work & money (12 comments total)

Ummmm, I guess I should have said:

United States of America.
posted by Flunkie at 6:19 PM on March 5

Just take the money back out before you file
posted by a robot made out of meat at 6:26 PM on March 5 [1 favorite]

If you read down, there's a part 2 and a part 3 where they tell you how to calculate the income on the excess contribution, which you also have to remove. They also discuss the traditional/roth interaction.
posted by a robot made out of meat at 6:29 PM on March 5

I don't know if you're self employed or have any 1099 income... but if this applies you might be able to use some type of retirement plan and the IRA limits won't apply. There are other limits but they're easier to work with.
posted by powpow at 6:41 PM on March 5

I'm self employed. I still have plenty of restrictions. I'd say that they're enough that getting a tax professional involved is a good idea at that point.
posted by a robot made out of meat at 6:45 PM on March 5

Thanks for the answers so far. I am in the process of reading through a robot made out of meat's link, and am not done with it, but another portion of my question came to mind:

At the very least, could I simplify things a little by just having two accounts (one Roth and one traditional) instead of my current three (Roth, trad deductible, trad nondeductible)?

That is, am I allowed to mix traditional deductible and traditional nondeductible contributions into the same account? I mean, without having to later deal with any excessive contribution stuff or so forth. Obviously I would still calculate how much of it is deductible, and report it as such.

I've always assumed that you can do that, and in fact you're pretty much expected to do that, but I've never done it because I've never seen anything clearly and explicitly saying that you can. Hence, my two separate traditional accounts, which is a bit of a hassle that I'd like to simplify if I can.
posted by Flunkie at 6:52 PM on March 5

Yeah, if you're self employed you should look into a Solo 401(k). Actually, if you have any 1099 income at all, you should look into a Solo 401(k).
posted by kindall at 6:56 PM on March 5

Also, if you ever have a really lean year, you should consider rolling your traditional IRA over into your Roth and taking the tax hit for it.

I am pretty sure you can mix deductible and non-deductible contributions in a single IRA, yeah.
posted by kindall at 7:01 PM on March 5

Why in the world would you want to mix the deductable and non-deductable? It isn't just the deductable now on your taxes you are talking about, it is whether or not you have to pay taxes on the money when you take it out 30 or whatever years from now. What a tracking nightmare you will set up for yourself mixing the funds together and trying to argue with the IRS that you don't owe taxes on it all. Just leave them separate so you don't have a real headache to deal with later.
posted by 45moore45 at 7:27 PM on March 5

It's no big deal, 45moore45. Your broker or bank or whoever has your IRA will figure that out for you.
posted by kindall at 8:15 PM on March 5

I agree with 45moore45 that it is a big deal and a bad idea to mix the contributions for Roth, traditional and non-deductible accounts. What if you roll that account over into something else, or if the brokerage is sold or something? What if you have to determine whether distributions are taxable are not and you have purchased the same security with multiple types of contributions? Given how trivially easy it is just to keep separate accounts, I would definitely do so. Mixing them would be an absolute record-keeping nightmare.
posted by iknowizbirfmark at 8:36 PM on March 5

Sure you can combine your deductible and non-deductible traditional IRAs (but not your Roth). Regardless of whether they are combined or separate you report your cost basis each year on Form 8606. You could have 10 deductible and 10 non-deductible IRAs and to the IRS they are treated and reported as if they were one single combined IRA, so there is no advantage of keeping them separate. Each year you carry over the non-deductible cost basis from the previous year's Form 8606 and add to it any new non-deductible contributions for the current year. The record keeping takes care of itself since you are required to update the 8606 each year. So yes, you could just put the total sum in either of your current IRAs at the beginning of the year and figure out the deductible and non-deductible portions at the end of the year.

There is a drawback to this strategy though. If you have non-deductible contributions you are better off placing them in a Roth IRA if your income is below the Roth cut off limit. That is because you never have to pay taxes on your earnings in the Roth, but you do have to eventually pay taxes on your earnings in the traditional IRA. Roth IRAs have to be separate.

Another strategy would be to guess on the portions that you would put into a deductible IRA and a Roth IRA. Just before the end of the year you should be able to determine a correction and withdraw from one and contribute to the other. Since you have to withdraw a pro-rated portion of earnings as well as the contribution, it would be better if you used completely separate, temporary IRA accounts to hold the annual contributions. That way the earnings calculation is simplified if a withdrawal is required since there are only that one year's contributions in that account. Later, after everything is settled out, you can then transfer the final amounts to merge them with your main IRA accounts. Then refill with temporary accounts with your next year's estimated contribution.
posted by JackFlash at 11:55 PM on March 5