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Roth ira limit for 2017 or 2018?

Community Leader
Super Contributor

Re: Roth ira limit for 2017 or 2018?


Subexistence wrote:

I make $19/hr as an intern and expect to make over $5,500 over the summer of 2018. I want to know if I'm allowed to just deposit $5,500 into my roth ira on January 3rd for 2018 before I earn $5,500.


 

Hello Sub Ex.  It sounds like there are two different questions you are asking. 

 

(1)  In your initial post, it sounded like you were asking whether a contribution made Jan 2018 could be counted as toward your allowable limit for 2017.

 

You then got a series of answers affirming that a contribution made in Jan could count toward 2017 (if you so chose) and then you would be free after that to make comtributions toward the limit for 2018.

 

(2)  In your most recent post (above) it sounds like the issue is meeting the requirement of having suffcient income earned for the calendar year in question.

 

The answer is that you are required to have earned at least whatever dollar value you invest from an actual job -- for the calendar year in question.  Money you get from loans, scholarships, grants, investments, interest on bank accounts, cash back bonuses from credit cards and bank promotions, gifts, and previous assets are not income from a job earned during the year in question.

 

So, if you want, some practical advice as to a plan for putting your money into your Roth, we'd need to know:

 

(a)  How much did you make on your W-2's for work during 2017?  (You likely do not have these W-2s yet, but estimate.)

 

(b)  How much will you make for work during 2018?  (You likely do not have these W-2s yet, but estimate.)

 

(c)  How much have you contributed toward your Roth in 2017 thus far?  (I think the answer is zero.)

 

Quick question for Grasshopper and anyone else who knows....

 

Note that our OP is putting money toward a Roth, which uses post-tax money.  Does he need to have shown that he earned at least $5500 after taxes (in net pay) or is gross pay sufficient?  If the answer is gross pay (and the person had $5300 in net income) it seems to go against the spirit of a Roth, since then the person contributing $5500 is necessarily using money from other sources.

 

This may be a weird corner case since it is probably hard to make $5501 in gross but not $5500 in net.  I'd imagine it is possible though.

 

Message 11 of 20
Established Contributor

Re: Roth ira limit for 2017 or 2018?

I think 7k from 2017. I’m guessing 10k for 2018. Do I have to get my w2 from the mail or can I use the wage and income transcript from the irs website? It would be much easier to use the income transcript from the website rather than visit each income source and request w2.



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Message 12 of 20
Community Leader
Super Contributor

Re: Roth ira limit for 2017 or 2018?

Are you estimating 7k gross or 7k take-home pay (after witholding)?

 

You are probably fine even if it is 7k gross, since I doubt you are paying $1500 or more in Social Security and taxes.  Just curious.

 

You don't need to supply the investment company (Vanguard, Fidelity, etc.) that is handling your Roth with any income documentation.  You just need to be confident that you made enough income from a real job.  Sounds like you are fine.

 

Thus you could transfer $5500 on Jan 3 and mark it as for 2017.  At the same time I believe you can also transfer $5500 and mark it as for 2018.  (It's conceivable that Vanguard or whoever might request that it be two separate transfers.)

 

Thus you can transfer $5500 for 2018 a week from now, even though manifestly that money has not come from a job (no possible way you have earned $5500 yet during 2018).  If, however, you failed to earn $5500 in 2018 later, then there would requirements to withdraw some portion of it I guess -- I think Grasshopper alluded to that.

 

As always, I am not a tax or investment expert, but I am pretty sure that's what everyone here would tell you.

Message 13 of 20
Established Contributor

Re: Roth ira limit for 2017 or 2018?


CreditGuyInDixie wrote:

Are you estimating 7k gross or 7k take-home pay (after witholding)?

 Gross

You are probably fine even if it is 7k gross, since I doubt you are paying $1500 or more in Social Security and taxes.  Just curious.

 

You don't need to supply the investment company (Vanguard, Fidelity, etc.) that is handling your Roth with any income documentation.  You just need to be confident that you made enough income from a real job.  Sounds like you are fine.

 

Thus you could transfer $5500 on Jan 3 and mark it as for 2017.  At the same time I believe you can also transfer $5500 and mark it as for 2018.  (It's conceivable that Vanguard or whoever might request that it be two separate transfers.)

 

Thus you can transfer $5500 for 2018 a week from now, even though manifestly that money has not come from a job (no possible way you have earned $5500 yet during 2018).  If, however, you failed to earn $5500 in 2018 later, then there would requirements to withdraw some portion of it I guess -- I think Grasshopper alluded to that.

 

As always, I am not a tax or investment expert, but I am pretty sure that's what everyone here would tell you.


Should I combine robinhood with vanguard. I could buy individual stocks on robinhood and invest my $11,000 in roth ira on vanguard index funds at admirals share rates. I would pay $0 in commission and still be able to diversify between stocks and index funds. 



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Message 14 of 20
Community Leader
Super Contributor

Re: Roth ira limit for 2017 or 2018?


Subexistence wrote:

I could buy individual stocks on robinhood and invest my $11,000 in roth ira on vanguard index funds at admirals share rates. I would pay $0 in commission and still be able to diversify between stocks and index funds. 

 

I would never advise someone who is new to investing to attempt to pick individual stocks.  Even many highly experienced investors do not do this.  Here are some articles that argue against it:

 

https://www.google.com/search?q=danger+of+picking+stocks&ie=utf-8&oe=utf-8&client=firefox-b-1

 

Note that you can still buy specialized funds that focus in specific areas of the market that are nonetheless collections of many stocks.  You can do this at Vanguard outside your Roth.  Just create a taxable account.

 

The strength of the Robinhood app appears to be for someone who plans to be buying and selling frequently and who has a strong desire to do this with his smartphone.  Some would argue frequent trading is almost never a good idea for the typical investor, but certainly it's a bad idea for beginners.

 

Of course, you may be interested in RH not to make money but for the same reason people go to Vegas or the races -- for the thrill of gambling.  You don't plan to spend much on RH -- it's just for fun.  If so, then of course it's fine.  I don't really discourage anyone from spending money to have fun, as they go into it with the expectation of not having it later.

Message 15 of 20
Established Contributor

Re: Roth ira limit for 2017 or 2018?


CreditGuyInDixie wrote:

Subexistence wrote:

I could buy individual stocks on robinhood and invest my $11,000 in roth ira on vanguard index funds at admirals share rates. I would pay $0 in commission and still be able to diversify between stocks and index funds. 

 

I would never advise someone who is new to investing to attempt to pick individual stocks.  Even many highly experienced investors do not do this.  Here are some articles that argue against it:

 

https://www.google.com/search?q=danger+of+picking+stocks&ie=utf-8&oe=utf-8&client=firefox-b-1

 

Note that you can still buy specialized funds that focus in specific areas of the market that are nonetheless collections of many stocks.  You can do this at Vanguard outside your Roth.  Just create a taxable account.

 

The strength of the Robinhood app appears to be for someone who plans to be buying and selling frequently and who has a strong desire to do this with his smartphone.  Some would argue frequent trading is almost never a good idea for the typical investor, but certainly it's a bad idea for beginners.

 

Of course, you may be interested in RH not to make money but for the same reason people go to Vegas or the races -- for the thrill of gambling.  You don't plan to spend much on RH -- it's just for fun.  If so, then of course it's fine.  I don't really discourage anyone from spending money to have fun, as they go into it with the expectation of not having it later.


In that case I will get index funds in my roth ira and etfs in my taxable vanguard account. Is there a need to diversify between bond etfs and stock etfs or can I go 100% stocks because my parents can provide safety money? Also is it fine to just invest in S&P 500 vanguard funds because of 20% corporate curts or should I diversify with Russell 2000 and foreigns index funds?



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Message 16 of 20
Community Leader
Super Contributor

Re: Roth ira limit for 2017 or 2018?

The single most important thing I would stress is reading two books by William Bernstein:

        IF YOU CAN (available free and targeted at Millenials)

        THE INVESTOR'S MANIFESTO (a deeper and longer book but still aimed at the beginning investor)

 

It's really important to be thinking about basic conceptual stuff right now.  Bernstein is especially valuable because he was formerly a neurologist and has a great deal of valuable advice about the mental habits of good investors.

 

Sure, I think a stock heavy portfolio makes sense, given your age, though you'll be able to decide whether it needs to be 100% stocks, 90%, 80%, or 70% after reading those books, thinking your situation through, and reading other articles, e.g. talking to people at Bogleheads, etc.

 

Of tremendous importance will be having spent some serious time thinking through what you will do when you encounter your first market crash (or if it is more gentle market "correction") -- greed and panic are two powerful drives deep in a person's brain and they cause 99% of investors' self-harm.  Bernstein has a lot of wise advice here, along with his deep knowledge of the markets themselves.

Message 17 of 20
Established Contributor

Re: Roth ira limit for 2017 or 2018?

if you are young , you pray for large pull backs but most people sell when this happens. The stock market is probably the only market in the world that people sell when things go on sale. 2008/2009 was a buying opportunity for this generation and many did not take advantage, including me.

Message 18 of 20
Community Leader
Super Contributor

Re: Roth ira limit for 2017 or 2018?


wa3more wrote:

if you are young , you pray for large pull backs but most people sell when this happens. The stock market is probably the only market in the world that people sell when things go on sale. 2008/2009 was a buying opportunity for this generation and many did not take advantage, including me.


+1.  William Benstein writes:

 

"A 25-year-old who is actively saving for retirement should get down on his knees and pray for a decades-long, brutal bear market so that he can accumulate stocks cheaply."

 

Our OP might find this brief little article helpful, which includes that quote:

 

https://thefinancebuff.com/100-percent-in-stocks-when-young.html

 

It addresses the 100% stocks question asked by our OP, but that's not what is important in it.  (Actually, I am not convinced by the author here -- there are strong arguments for not being at 100% equities if indeed a market crash might be imminent, notably to have cash on hand to buy stocks cheap!)  What is instructive is the deeper conceptual point that the writer is making about the future stream of money that a millenial has which has not yet been invested.

 

Getting people to opine about specific questions is not nearly as important as developing the conceptual tools and mental/emotional outlook for being an investor for the next 40 years.

Message 19 of 20
Valued Contributor

Re: Roth ira limit for 2017 or 2018?


Subexistence wrote:
Which tax form do you use as a student? Do you take standard deduction?

Last year I filed a standard 1040. I take the standard deduction. Because our incomes are low, that's why a ROTH makes more sense, at least right now, over a traditional IRA.

 

CreditGuyInDixie wrote: 

Quick question for Grasshopper and anyone else who knows....

 

Note that our OP is putting money toward a Roth, which uses post-tax money.  Does he need to have shown that he earned at least $5500 after taxes (in net pay) or is gross pay sufficient?  If the answer is gross pay (and the person had $5300 in net income) it seems to go against the spirit of a Roth, since then the person contributing $5500 is necessarily using money from other sources.

 

This may be a weird corner case since it is probably hard to make $5501 in gross but not $5500 in net.  I'd imagine it is possible though.

I don't believe it's possible unless you make errors on your taxes e.g., failing to subtract the standard deduction. One of the IRS's examples makes it evident that they're talking about total comphensation: "Danny, an unmarried college student working part-time, earns $3,500 in 2017. Danny can contribute $3,500, the amount of his compensation, to his IRA for 2016."

 

I will add, on the note of individual stocks, that I've made two recent transactions for such. One went up, one went down. Am I still ahead? Yes. Am I ahead as much as I would've been picking an index fund? Not quite. Though I am planning to ride out the latter for a bit as the news on the company has been interesting for a potential bounceback.

 

I will also add, that I do have some international broad market funds mixed in, but not a lot. It's good to diversify. On the note of bonds, REIT's, etc., they're my only ETF losses as of late. Granted, if the market goes belly-up, they'll be relatively safe.


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Message 20 of 20