How Should I Roth IRA for 2012?

I love the Roth IRA, except for one thing – the income caps on eligibility. Sure, there’s the back door, but that makes things far more complicated.

I also like the structure of my income in that I have a good monthly salary, plus bonuses throughout the year, except that my income is largely dependent on my company’s stock price. If the stock price swings really low or even just a little low at the time of my bonuses, then I will be eligible for a full Roth IRA. On the other hand, if the stock price swings high at the time of my bonuses, then I could be eligible for either no Roth IRA or a partial Roth IRA.

This basically puts me in the situation that I can’t contribute to my Roth IRA until I know how much my gross income will be for the last year, which is after my last bonus. I have several options for this:

1) Per my Roth IRA investment schedule for the year, accumulate the full $5,000 amount in a targeted savings account. Once I know my final gross income for the year, invest the amount that I can contribute to my Roth IRA and invest the remainder of this account in a taxable investment account. This means that I wouldn’t be “maxing” my Roth IRA out until December, if at all, and this $5,000 would be out of the market for up to 12 months, sitting in a savings account, earning only about 1% interest (aka about $50 over the course of the year).

2) Per my Roth IRA investment schedule for the year, accumulate the full $5,000 amount in my taxable investment account, keeping with my target asset allocation. Once I know my final gross income for the year, calculate the amount that I can contribute to my Roth IRA and sell that amount in taxable and move it to my Roth IRA. This could mean that I would have a large taxable event if I end up being able to contribute the full $5,000 amount to my Roth IRA.

3) Per my Roth IRA investment schedule for the year, accumulate the full $5,000 amount in my Roth IRA account, keeping with my target asset allocation. Once I know my final gross income for the year, calculate the amount that I can contribute to my Roth IRA and recharacterize any extras to my Traditional IRA. This would be annoying if the recharacterization amount was less than $3,000 since then I can’t buy any good Vanguard funds. Also, any Traditional IRA contributions I make are non-deductible, so I don’t really like the Traditional IRA.

4) Per my Roth IRA investment schedule for the year, accumulate the full $5,000 amount in my taxable investment account, not in my target asset allocation, but in a money market fund. That way, the money is already very clearly earmarked for investing, but it wouldn’t generate as significant of a taxable event, considering that it’s a buffer account and I would only be taxed on the dividends that I earn in until I move the funds to my Roth IRA. I would, however, have to keep these funds out of my asset allocation spreadsheet so that the extra $5,000 in cash doesn’t mess up my calculations.

I flat out don’t really like option 3) because it could leave me with orphaned amounts in my Traditional IRA. I think that option 1) is better if I’m likely to be able to contribute the full amount to my Roth IRA or close to it, but option 2) is better if I’m likely to be able contribute a small amount (lower taxable event). Option 4) is pretty similar to option 1) and could actually be the best option.

By July, I should have a pretty good idea of my income for the year and could make a partial Roth IRA contribution since my later bonuses will be fairly small. So maybe option 4) does make more sense, with me doing most of the Roth IRA contribution in July, which would only keep these funds out of the market for about half a year.

Which option would you pick?

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3 thoughts on “How Should I Roth IRA for 2012?

  1. So confused. What is the income limit again? Shouldn’t’ t u clarify that first for those not working in finance? I am a teacher and do.not need to worry about income limits.

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