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The Pros of Maxing Out Your Roth IRA!

by J. Money on Wednesday, November 16, 2011

wall street bull

For a world record THREE years in a row, we’re going for the good ol’ IRA Max again!  Woohoo! $5,000 out of my cash reserves (I hope they enjoyed it there while they could! haha…), and right into my brokerage Roth IRA  ;)  One of my favorite tools around, and yet it almost slipped my mind this year – Yikes! Where else can you grow your money TAX-FREE forever and ever and ever? (And don’t you say that Obama or someone later will change it either – that would be all kinds of jaaaaaaacked up!).

I love it though cuz it’s such a finite limit on how much you can add in ever year ($5,000 if you’re 49 and under, and $6,000 if you’re above AND don’t make too much to disqualify), so it’s such a “WIN” under your belt when you can pull it off.  If you’re good and can set aside around $400 each month, and set it all on rotation, you’ll max it out time and time again as the years go by and you get older and grayer.  It’s pure awesomeness. Even if you only earn 5% each on your investments, you could come out with almost 1/2 a million dollars JUST in your Roth alone!  How crazy is that?  (Try out Bankrate’s Roth IRA calculator to give you an idea — I just did it for my situation and it says I’ll have $600,000+ when I “retire” at 65, W00T!)

One of my brother in-laws once told me that all he and his wife does is max out their 401(k)s and Roths every year, and then anything else is spending money.  “All they do,” right? ;)  It comes out to a little over $40,000 a year which then turns into about $200 billion dollars in retirement, haha…. or, like $2Mil to $3Mil, but still – crazy.  (And by “crazy” I mean “I’m totally jealous”).  I’ve come close to pulling that off and made it HALF of the way there 2 years ago with my 401(k) and Roth IRA max-combo, but unfortunately we couldn’t do it for the wifey as well.  Either way it’s a $hit ton of money no matter how you look at it, but the idea behind it all is the same:

Get in the mindset of hitting a certain goal each year & as time goes on it’ll grow exponentially.

And it honestly won’t take *that* much more effort out of you once you’re in the rhythm.  That $5k I invested last year, and the $5k the year before that?  It’s now up to $20,000.  You can’t expect double returns every 2 years of course, but if you stick to it each and every year, you’ll end up with plenty enough money by the time you need it for sure.  It’s just a matter of getting into the habit. (And, of course, making enough to put in this “extra.”  Gotta hustle, hustle baby!)

The only thing that remains now is *WHAT* exactly to invest this new money in :)  I’ve got $5,000 in pure cash sitting in my brokerage Roth now, and I gotta find something purrty to invest in.  I’m thinking maybe some individual stocks? Anyone have anything they like right now? All my other accounts have all the boring diversification funds growing inside them, and I like the idea of keeping THIS one more fluffy and fun.  I’m a huge believer in allocating a small % to riskier or do-it-yourself moves to keep things exciting.  Which isn’t to say I wouldn’t be upset if I lost it all in here, but at least I’d have the other 90% invested away intelligently as planned ;)

What would YOU invest in if you had $5,000 right now? (And you *had* to invest it)

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(Photo by ojoswi)


{ 33 comments… read them below or add one }

1 cashflowmantra November 16, 2011 at 7:32 am

I would pick a nice dividend paying stock like Intel. I would also buy a little now, in 3 months, and in 6 months. If it goes up, then your first purchase is profitable. If it goes down, then you have dollar cost averaged and gotten to purchase more.

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2 Mary H November 16, 2011 at 9:39 am

I’m jealous – my Roth at Vanguard is suckin’ wind right now :(

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3 PKamp3 November 16, 2011 at 9:42 am

Respect! Keep stacking those 5Gs, baller!

The Roth IRA is vastly underrated. Good work on hitting the max!

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4 Chris C. November 16, 2011 at 9:58 am

@cashflowmantra: I have heard multiple “financial thinkers/scholars” debate the merits of DCA and have come the the conclusion that most if not all investment strategies are grossly oversimplified applications for a very complex system.

In Dollar-cost Averaging: An Investigation Wei Fang looks at some 27 papers comparing investment strategy and determines that DCA is good at mitigating risk, but not good at yielding larger returns.

Given that J$ has told us he is an aggressive investor I think he should be investing either lump sum investments or maybe value averaged investments as described by Paul Marshall, which both Fang and Marshall agree generate larger returns without similar risk to DCA.

@J$: I would max out my Vanguard Roth IRA which is invested in Vanguard Target Retirement 2055 and put the other $1000 to paying off my student loans as the interest rate on them is significantly higher than any investment I had seen currently.

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5 Well Heeled Blog November 16, 2011 at 10:06 am

LOVE the Roth IRA. It’s very sexy. :) I’ve been maxing it out since 2006, my fiance since 2009. Even with the markets being the way they are we’ve had a little bit of growth. What your brother-in-law did is AWESOME. That’s my eventual goal for CB and I – that we both max out our 401Ks as well as the Roth IRA.

If I had $5K right now, I’d probably put it in a REIT.

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6 Alexis November 16, 2011 at 10:06 am

I’m with cashflowmantra. Dividend stocks are the way to go. But you’re going to have to do some research (boooooooo, right?) to find one ( or several, if you want less risk) that you’re comfy with. I like AT&T, but that’s just me. Some utility stocks are awesome (check out Duke), but they’ve been going up lately while the rest of the market has been going down, so do your hw to make sure what you want isn’t too expensive. Of course, you’re in it for the long haul, so a solid dividend stock will pay even if the price stays steady for the next few years.

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7 Brian November 16, 2011 at 10:25 am

I love my ROTH and finally got my old lady to open one this year. Personally I am invested in some Dividend paying stocks in my ROTH (I researched and picked some off the dividend aristocrat and champion lists). Before I went down that path I had used one for the “lazy portfolios” and that is still doing pretty well.

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8 Matt November 16, 2011 at 10:30 am

J money,

Do you just transfer over $5,000 that you saved throughout the year at the end of the year, or do you consciously pull out $400 each month? I try to throw $200 or so in the IRA when I can, but I have been unable to max it out.

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9 crashdamage1957 November 16, 2011 at 10:36 am

Good work there, J. I have maxed out my IRA every year since my very first job out of college, first with the old deductible IRA’s, then switching over to Roth contributions when that version became an option. Back in the early days, the max was only $2000 a year, and even with the ups and downs of the market over the years, I have still managed to accumulate a tad over $380k in the IRA, with another $73 k in my non- working spouses spousal IRA , as well as a similar amount in a $401k that I moved over to a self directed account at Vanguard when I left full time work. Now that I’m semi retired, my earned income is lower, but i still make enough to be able to put the max every year into my HSA account, ( $6150 this year, $6250 in 2012) which I see as an IRA in steroids. Its fully tax deductible in the year of the contribution, and distributions are tax free when used for medical expenses, and tax free for any use when the account owner is 72 or older. The HSA funds are invested in a money fund account, just in case they are needed for medical expenses. But to answer your question, I would direct that $5000 into the same asset allocation plan I have now, spreading it out among mutual funds holding domestic and international stocks, domestic and international bond, some REITs , as well as adding some to the cash reserve portion.

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10 Edward Antrobus November 16, 2011 at 10:40 am

The money just hasn’t been there to max out my Roth. In fact, I haven’t put any money in it at all in the last 2 years.

But my investing strategy is income-generating mutual funds. Even though I’m still relatively young, I do not have a high risk tolerance. I may not retire a millionaire, but I’ll retire with enough for my needs and not get too stressed about it.

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11 Matt, Tao of Unfear November 16, 2011 at 10:43 am

I’ve been tracking a few mock portfolios since July 3rd on Google Finance, since I wanted to start playing around with some non-retirement investing. I told it that I had $10k that I wanted to invest, chose some Dow stocks with high dividends, and let it loose. I’ve been beating the Dow, NASDAQ, and S&P 500 this whole time. Of course, the market has done horrible things since July. I’m still down 1% technically, but a good chunk of that is because of the commission I factored in to each buy.

It looks like you want to get this money into something in a hurry (and why wouldn’t you), but I would also set up some mock portfolios in Google Finance and monitor them over the next year, just to see how they do against each other.

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12 tom November 16, 2011 at 11:13 am

@J… well done, my friend!

Here’s the real question everyone wants to know: why are you not dollar-cost averaging your contributions?

And to answer your question… I’m investing my $5,000 (total) Roth contributions into the Vanguard 2050 fund. Eventually I want to break this apart and invest in a number of funds, ETFs, emerging markets, industry specific stuff, but I don’t have enough to meet the minimums on all of those.

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13 SmartAssetTeam November 16, 2011 at 11:25 am

You are putting me on the spot with that question, but I think I would have to invest that in our startup! I do like your advice on maxing out the Roth IRA. It sounds too good to be true, thanks for the tip.

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14 FB November 16, 2011 at 11:42 am

Ok one thing I always wondered. If married can you each contribute 5000$ to a ROTH or is it a total of 5000$ combined for married joint filers?

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15 Jen @ Master the Art of Saving November 16, 2011 at 11:50 am

That’s so awesome that you’re able to max it out for yet another year! I can’t wait until we’re able to do that. Baby steps 4 us.

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16 Bryan at Pinch that Penny! November 16, 2011 at 12:51 pm

If I had to buy stocks, I’d probably go half Cisco and half Disney (I think both of which are undervalued right now).

If I could invest in anything, I’d probably start a Roth account at Lending Club or one of the other P2P sites. Even choosing loans conservatively earns people 6-7%, and I kind of abstractly like the idea of investing in people versus investing in big businesses.

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17 Emily November 16, 2011 at 2:37 pm

I would invest in land.

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18 Aaron November 16, 2011 at 4:01 pm

I just maxed out my Roth for the year. I’m 23 and just started working so I’m pretty excited. Quick question though: what happens when you hit $107,000 in annual income? That seems to be the limit so do you just stop contributing to the Roth then?

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19 J. Money November 16, 2011 at 4:18 pm

If anyone has any detailed questions, check out this PDF as it will have your answers :) I suck at the details, haha…

http://www.irs.gov/pub/irs-pdf/p590.pdf

@cashflowmantra – Nice nice, I will add that to my consideration list, thank you sir :)
@Mary H – Have you been pumping it up, or just the whole account in general has been down? I def. got lucky in that I started funding mine towards the bottom of the crash, so really it can only go up from there (knock on wood!).
@PKamp3 – Haha… yes, now maxing out a Roth DOES make you a baller ;) I should bring slips of paper saying I’ve maxed that out instead of all my credit cards, haha… well played, my man.
@Chris C. – Interesting… I will think about that fund too, thanks! And yeah, I can see how dollar cost averaging is more of a safer bet than growth one. Though in some cases we don’t really have the choice (as in 401(k)s). I probably will just pump all $5k into investments all at once, but mainly so I don’t forget ;) And also for the nice rush!
@Well Heeled Blog – Agreed! I almost titled this one “Roth IRAs are Sexy too!” Haha… like minds, my friend, like minds ;) I’ll look into some REITs, I don’t belive I have any of those? Might be a nice time to pick up a little and get my toes wet. To success, baby!
@Alexis – I know, that’s the part I suck at – haha… and one of the reasons I’m asking all of you ;) I actually already have AT&T in there when I was copying Warren Buffett. I’ve considered Intel too before, but can’t remember why I didn’t follow through — maybe ran out of money? Adding it back to the list again, thx!
@Brian – Oooooh I need one of those! They’re from Motley Fool yes? Or was it Bogleheads? Always forget.
@Matt – I think either way works :) I used to do a few hundred here and there, and then at the end dump in whatever’s missing (when I was working full-time and blogging the rest of the time), but this year I just did a one-time xfer. My $ is kinda all over the place since it’s never secured, so when I think I’m doing well, I find places for it as soon as I can :) If I started receiving a steady paycheck again though, I’d totally go back to $X amount every month until it’s fully-funded. I like doing everything as evenly as I can w/ that stuff.
@crashdamage1957 – NICE WORK!! That is awesome yo. I REALLY hope I’m like you when I grow up :) Those are some freakin’ nest eggs you’re buliding up, I love it! And your answer to my question today totally sums up your intelligence. I find that people who know exactly what they’d do with their money – whether it’s an additional $100 or $1,000 – have incredible systems in place. And it’s just a matter of pumping it up from that point. Congrats on all your success!
@Edward Antrobus – Hey, that’s all we can ask for right? Being happy and stress-free? That’s the good life, brotha :)
@Matt, Tao of Unfear – Oh, cool. Never even heard of that before – I’ll look into. Thanks man :) Great idea.
@tom – I no longer have a steady paycheck, so had to wait until I had enough saved up and could comfortably invest in the Roth again (I honestly forgot about it till this week, and realized I could afford to throw some money in – though even earlier this year I planned to wait to the end to do it). In my perfect world I’d invest/save/pay off debt everything in broken down steps every single month, but I just don’t have that luxury any more. So now I jump on things whenever it seems like it’s a good idea ;)
@SmartAssetTeam – Do you guys have that option? Cuz that’s awesome if so! Though I wouldn’t invest ALL my money into one spot like that – esp startups ;)
@FB – Yup, according to the IRS both people in a marriage can invest in their Roth IRA up to the max each – provided your income doesn’t go over a certain amount (I think it’s over $150,000 combined?). There’s more info here, if interested: http://www.irs.gov/pub/irs-pdf/p590.pdf
@Jen @ Master the Art of Saving – Baby steps are important! I wasn’t able to do this until 3 years ago ;) We all gotta start somewhere.
@Bryan at Pinch that Penny! – Oh cool! Can you do that at Lending Club?? That’s kinda awesome. Some states (like mine) are not allowed to participate in P2P things :( Sucks. I can w/ Kiva though – even if it’s a different kind of lending…
@Emily – Yeah? Like, physical land or land in trusts and all that? Do you know any for sale at $5,000? ;)
@Aaron – Nice! Congrats! I think the amount you can put in just goes down as your income goes up till you can’t put in anything any more. IT doesn’t go from $5,000 to $0 at least as far as I know. This would have all the answers though: http://www.irs.gov/pub/irs-pdf/p590.pdf

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20 Jackie November 16, 2011 at 4:56 pm

If I had to invest $5k right now (oh, the tragedy that would be :p) I’d go through my list of about 50 stocks and get the next 12 or so in line. I think one of those is Costco; I like Costco.

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21 LB November 16, 2011 at 5:32 pm

What a good question! I have been lazy with looking at investing in anything lately, because I have been busy with other priorities. If I had $5000 I would invest in:

Myself – School is going to cost me $91,000 and take a really long time.
Land – I would move my home to land and live where I could have chickens, but be close to a city
or
Stocks – I would go a little nuts and randomly pick some companies I like and let it ride.
I think the 3rd option sounds like lots of fun, but would definitely put it towards school so I could graduate quicker than 6 to 7 years from now.

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22 Mark November 16, 2011 at 8:40 pm

Take a chance on a company like Sprint. Their stock is around 2.85 a shared (so you can buy ~1750 shares). Wouldn’t surprised to see them get bought out at some point by Verizon or AT&T, at which point the shares would jump way up. Also, they may take-off on their own over the next few years and maybe you’ll be looking at a $20 stock 3-4 years from now!

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23 Barb Friedberg November 16, 2011 at 11:44 pm

We’ve been maxing out our IRA’s for decades, and it adds up over time ;). I would invest in a broad based international ETF right now!

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24 Cherleen @ My Personal Finance Journey November 17, 2011 at 5:04 am

There are a lot of options where I can invest $5000 but definitely it will be on stocks. Which companies, I still have to decide. :)

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25 thefrugallery November 17, 2011 at 9:17 am

Don’t forget, you actually have until tax day to contribute to the prior year. So if things are tight you can always use the first first months of 2012 to catch up!

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26 J. Money November 17, 2011 at 8:04 pm

@Jackie – I think a lot of people like Costco :)
@LB – Oooh you could get a LOT of chickens with $5,000 too I’d imagine!
@Mark – That’s true! Too bad I hate their service, haha… but business-wise it could be a smart move.
@Barb Friedberg – I could have guessed you do cuz you’re smart! :)
@Cherleen @ My Personal Finance Journey – Let me know if you come across any good ones – I rarely research them :)
@thefrugallery – Yup! Good point. I always forget about that too.

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27 Carrie - Careful Cents November 18, 2011 at 7:51 pm

I’ve had to be disciplined and not max out my IRA because I’m trying to pay off the last of my debt..my car loan. I can’t wait till I can completely focus on retirement, investing and savings. Your post here makes me want to really kick it into gear :)

Also, you could check out Betterment.com which will be rolling out IRA’s in about a month. I attended a webinar with the CEO and it looks really great. I like having more control over my investments but it’s still simple. Hope that helps some.

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28 Sun November 19, 2011 at 5:14 pm

Im just going to stick with my vanguard 2040 (vforx) if I had an extra $5k. I rather have my money working for me instead of some chump taking a bite with “expert” trades.

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29 J. Money November 21, 2011 at 10:44 am

@Carrie – Careful Cents – Nice! Yes, keep it up over there so you can knock all that debt off! That’s awesome, I can’t wait to hear until you’ve killed it :) And thx for betterment too – been keeping my eyes on them, just haven’t dug too deep yet. Should be interesting!
@Sun – Haha, whatever works! :)

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30 Bryan at Pinch that Penny! November 23, 2011 at 1:47 pm

I did a little more research, and I’d like to revise my response. Lending Club does have a Roth IRA option, but if I could only plunk down $5,000, I’d probably not put it there because they take a $100 fee out of retirement account for balances less than $10,000.

However, if I was pretty sure I’d be able to put $5,000 in next year, I’d go with Lending Club because there’s some sort of grace period the first year with a Roth where there’s no fee if your balance is $5,000 or more during the first year, but it goes up to a $10,000 minimum balance the next year.

I don’t think I explained that well, but I think you get the idea. :-)

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31 J. Money November 23, 2011 at 6:20 pm

Nah, I got it – def. clear :) You want to borrow $10,000 from me over 2 years, yes? haha…

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32 benj.frank November 2, 2012 at 8:51 am

Use the Roth to invest in some mutual funds, then when you’re around 100,000 start building a more well rounded portfolio with stocks etc.

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33 J. Money November 2, 2012 at 5:20 pm

Not a bad plan at all… I have all my mutual funds in my Traditional IRAS, and then actually use the Roth for specific stocks – but either way works!

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