Frequency of backdoor Roth contributions?

[jreyno71]

Just created my (and spousal) first Vanguard backdoor Roth IRA with all the money we're saving after dumping my whole life insurance policy (thanks, WCI!).

I'm set for 2016 - $5,500 in each. But now I'm eyeing 2017... every tutorial I've read describes contributing to traditional IRA in one lump sum annually and then converting to backdoor Roth all at once at the same time.

Is there some reason I shouldn't dollar cost average and contribute monthly (e.g. $5,500 / 12 = $458.33) to my tIRA (and then also convert monthly to backdoor Roth to avoid taxes on gains)? Don't I want that money working for me as soon as possible, instead of waiting a full year to contribute again? Don't I want to dollar cost average by contributing monthly instead of annually?

Thanks!

[MaxPower]

So why not just contribute the full $5,500 to your tIRA on January 2nd (or first business day of new year) and then convert it to Roth IRA the next day or so? Wouldn't that get your money working for you earlier than spreading that $5,500 out over the next 12 months?

[jreyno71]

In my case, only because I just depleted my earmarked Roth money. It'll take time to build it back up to the contribution limit.

Is there some reason I'm not thinking of that I shouldn't put earmarked Roth money in the backdoor each month when it becomes available, instead of one lump sum annually? Catching attention of IRS, limits on number of backdoor uses, tax penalties, variations on the pro-data rule, etc.

And then philosophically, isn't it better in general to invest more frequently and dollar cost average?

[jfoxcpacfp]

jreyno71 wrote:

In my case, only because I just depleted my earmarked Roth money. It’ll take time to build it back up to the contribution limit.

Is there some reason I’m not thinking of that I shouldn’t put earmarked Roth money in the backdoor each month when it becomes available, instead of one lump sum annually? Catching attention of IRS, limits on number of backdoor uses, tax penalties, variations on the pro-data rule, etc.

And then philosophically, isn’t it better in general to invest more frequently and dollar cost average?

Click to expand...

The only reason is the added steps needed to convert every month. Much easier to do in one lump sum, preferably at the BOY. As long as you don't mind that, follow your DCA plan. Wait a few days to convert, though, and remember to file your form 8606 every year.

[The White Coat Investor]

jreyno71 wrote:

In my case, only because I just depleted my earmarked Roth money. It’ll take time to build it back up to the contribution limit.

Is there some reason I’m not thinking of that I shouldn’t put earmarked Roth money in the backdoor each month when it becomes available, instead of one lump sum annually? Catching attention of IRS, limits on number of backdoor uses, tax penalties, variations on the pro-data rule, etc.

And then philosophically, isn’t it better in general to invest more frequently and dollar cost average?

Click to expand...

Here's the way look at it. If you're making enough that you have to do your Roth IRA contribution through the backdoor, you're making enough that you can lump sum it all at once. I mean, presumably you've got a $200K+ income. So $5,500 is something like 3%. It shouldn't take 12 months to save that up. In fact, you should be saving something like that every month. So instead of doing a 401(k) contribution in January, just do your Roth IRA. Then in February, instead of a 401(k) contribution, do your spousal Roth IRA. Then you can start your 401(k) for the year etc. Invest your money as you earn it, it's just sometimes it goes in the Roth IRA and sometimes it goes in the 401(k) and sometimes it goes in the taxable account etc. The money I use to do my 2017 Backdoor Roth IRAs in January 2017 is earned in December 2016 (although technically it's money I earn later in 2017, but the IRS doesn't care as long as I have income in 2017.)

You can do 12 backdoor Roth IRAs each year if you want, but it introduces a lot of unneeded complexity, and the "DCA" effect is pretty minor.

Now, if you make $50K a year, I understand why you couldn't lump sum $5,500. But then you could do direct Roth IRA contributions.

[pulmdoc]

Dollar-cost averaging is a suboptimal approach to a lump sum investment for the simple reason that you are leaving part of the lump sum in cash until it gets invested, usually months later than it is available. This reduces market exposure and therefore earning potential. What most people think of a dollar-cost averaging is more properly referred to as periodic investing: committing a certain amount of money per month/pay period. This is preferable to trying market timing or waiting to the end of the year to invest.