When Do You Have to Put Your Money Into a Roth IRA?
When you open a Roth Individual Retirement Account you, rather than your employer or anyone else, must fund the account. You do not have to open or fund a Roth IRA, and many taxpayers invest in other kinds of retirement accounts. However, if you do choose to make contributions to a Roth, you must make your contributions before the end of the tax year.
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Funding A Roth
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The tax year begins and ends on April 15, although if this date falls on the weekend, the Internal Revenue Service extends the deadline for filing taxes and making contributions into retirement accounts until the next business day. While you can file your taxes for the previous year any time between January 1 and April 15 of the current year, the IRS provides a much larger window for making IRA contributions. You can make your Roth contribution for the current year any time between January 1 this year and April 15 next year.
When To Contribute
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Investments into Roth IRAs are on an after-tax basis which means that contributing to a Roth does not cause your taxable income to decrease. However, funds in a Roth grow tax-deferred. You pay no taxes on withdrawals from a Roth as long as you do not access the funds within five years of creating the Roth account and before you reach the age of 59 1/2. Therefore, you should invest in a Roth if you are seeking a tax-efficient way to invest for your retirement years.
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Two Contributions
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The Internal Revenue Service only enables taxpayers under the age of 50 to invest up to $5,000 per year in Roths whereas people who are 50 or older can invest up to $6,000. However, you can make contributions for both the current year and the previous year at the same time if you invest in a Roth between January 1 and April 15. Therefore, depending on your age, you can invest up to $10,000 or $12,000 at one time.
Breakpoints
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Many investors buy shares in mutual funds with the proceeds invested in a Roth IRA. If you buy A-shares of a mutual fund you pay a commission of 4 percent or 5 percent every time you buy shares. However, mutual funds offer "breakpoints" which are sales discounts on share purchases. Typically, you receive a breakpoint discount on the commission if you buy more than $50,000 of shares within a 13-month period. You could not reach such a figure by making your annual contributions, but if you started a Roth mutual fund with a large lump sum of money rolled over from another account, you could take advantage of the breakpoint when you made your next investment. Therefore, if you have such an account, ensure you invest each year in the time frame to enjoy the breakpoint. If you start the Roth in January this year, you miss the breakpoint if you wait until April next year to add to it.
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References
- Internal Revenue Service: Retirement Plans FAQs regarding IRAs
- Internal Revenue Service: 2011 IRA Contribution and Deduction Limits
- Securities and Exchange Commission: Breakpoints; July 2010
- Internal Revenue Service: 2011 Contribution and Deduction Limits - Amount of Roth IRA Contributions That You Can Make For 2011; November 2010
