Tricking Tax Year 2015

That title just sounds a lot slicker than “Unusual Retirement Account Funding Techniques.

Last year in April I wrote Debt Free, my ode to faithfully filling up my Vanguard Traditional IRA to its $5,500 brim. At that time I was about $2,500 short of maxing out my IRA. My solution was to fund my Target REDcard (since discontinued by American Express) by charging the $2.5k to my Capital One VentureOne card, withdrawing the balance from REDcard to my checking account, and finally transferring the funds to my IRA account.

As of this February I was able to stash away $3,500 in my Vanguard, but the 2015 contribution limit was still $5,500. To make up the shortfall when filling out my taxes online this year I simply indicated that I would be contributing an additional $2,000 before April 15. As expected this contribution reduced my taxable income by the same amount ($2k) and added another $300 to my Federal tax refund! So, in essence, by stashing away $2k for my future self I am rewarded with $300 extra dollars, plus the continual appreciation and long-term gains of that $2,000!


Rollover Madness

Another big item for Tax Year 2015 was rolling over my two 401(k) accounts (regular and Roth), left over from my previous job. (The Roth account type is apparently not too common to find offered in a 401(k) vehicle.) This process was actually something that I initiated last year toward the end of September. I learned a couple of things along the way, but unfortunately managed to land myself in a big pitfall. Basically I lost money during the process by unintentionally leaving myself exposed to the volatility of the stock market.

In the two 401(k)’s my fund allocation was a 50/50 split between the S&P 500 and the Russell 3000. As it so happened, just when the shares were sold the market began trending upward so that 5 days later, when the rollover check reached Vanguard, VTSMX had climbed 5.2%! This meant that when the funds were reinvested, they actually bought 5.2% less shares than they would’ve had the Sell → Transfer → Buy process been instant. A stinging lesson to learn! At least now, however, there is plenty of excellent advice from the Boglehead community for avoiding this issue when performing future rollovers.

To illustrate the loss, over the course of those 5 days I charted the market performance for three values:

  1. Actual value metric – 401(k) amount rolled over (value of fund liquidated on day 0) and exposed to market volatility, tracking no index
  2. Optimal value metric – 401(k) theoretical fund value if total liquidation amount was immediately transferred to Vanguard, tracking VTSMX
  3. Comparative value metric – 401(k) theoretical fund value scenario representing no rollover action taken allowing the fund value to fluctuate naturally over the 5 days in the market. Tracking a 50/50 split of the S&P 500 and Russell 3000, my previous allocation strategy

Note that 2 & 3 (the Optimal and Comparative values) should be similar as both tracking variables are based upon the actual total stock market performance over time. To arrive at the loss take the difference between items 2 and 1 or 3 and 1. Loss/gain percentage values can then be derived from these daily index share price fluctuations and can be helpful in visualizing this whole big financial dance.

A tragic 5.2% loss, the difference between red and blue

A tragic 5.2% loss, the difference between red and blue


Final Thoughts

Between aggressively saving for retirement and the accidental loss of investment value, sometimes I win some and sometimes I lose. However, by steadfastly saving and only occasionally slipping up, the whole process becomes an ongoing exercise in strengthening my financial mentality. To me that is worth more than money!

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