Lost Money on Roth - Can I contribute more?

[Guest DaveXxxx]

I am a 46 y/o who started a Roth IRA this year with an initial lump sum contribution of $4K. After some unwise investment choices that original investment is now worth $3,700. My question is - am I allowed to put in $300 to bring it back up to $4,000 or are my deposits strictly limited to $4000 for the year.

I have not withdrawn any of the funds and do not intend to do so anytime soon. I am simply trying to find out if I can put in additional cash to get back to my $4000 starting point before choosing other invesments within my 401k.

I appreciate any and all responses and advice. If additional info is needed please let me know.

-Dave

[Guest ctfudge07]

Hi - it's me, who posted a lot six months or so ago. I don't mean to butt in like the classic nagging wife, but that's my husband up above, and he meant to say "in my Roth IRA," not "in my 401K." He has one of those, too, but that's not what he was talking about - it was just a mistype.

Also, he did not withdraw the money and doesn't plan to, but he did sell the investments. It is a Firstrade Roth IRA that had $4000 deposited into it earlier this year and he immediately invested in two mutual funds. Whether right or wrong (no lectures please on investment philosophies) we panicked last week watching all of our investments tumble and sold many of them, including those two, but the proceeds are just sitting there in the Firstrade Roth IRA account so that when he decides what would be a more appropriate mutual fund or other investment, when/if the market settles out, he can direct the money in that direction.

Pardon our newness to all of this, but while we understand a lot about investing and IRAs now (particularly Roths), generally people hope and assume that the value of their investment will increase every year (although maybe not increase every day of each year.) We're probably confused about the whole nature of IRAs, but we sort of thought the idea was to have $4000 (in our case, for each of us, and we're sure of the eligibility requirements for maximum contribution) with which to get some returns that will eventually be treated differently than the returns on other investments (in taxable accounts.) What would happen, if, for an extreme example, someone put their 4K into a very bad investment and had only $50 left once they sold what was left of the investment - would they only be able to invest that $50 for the rest of the year before putting in another $4K the next tax year? Again, forgive our ignorance relative to the rest of you here, and thanks for enlightening us.

[Guest DaveXxxx]

Ooops sorry about that. Yes - I was talking only about my Roth - not my 401K. I want to make sure I get the most bang for my buck, and if I can boost my bucks back up to $4,000 before getting the money reinvested that would be ideal.

[papogi]

To answer your question, if you’ve contributed your maximum amount for the year, then you can’t contribute any more than that, no matter how good or bad the investment goes.

While you asked us to excuse your lack of investment knowledge, I can’t help but add a few comments meant only in a supportive and positive way. It is not accurate to expect any mutual fund with any stock (or most bond, for than matter) exposure to have up and down days but only overall up years. Stocks and bonds have down years, and sometimes more than one in a row. Part of investing is risk tolerance, and if your risk tolerance is very low, then it is what it is. You can invest in things like money markets and CDs and be virtually guaranteed of no down year, but your upside potential will be severely limited, and your protection against the risk of inflation will also be very low. It’s all about the time horizon that you think you will need the money, your risk tolerance, the risk/volatility of the particular mutual fund (what it invests in), etc. Basic investing knowledge can be gotten from magazines such as Kiplinger’s, etc. Don’t get me wrong, I think you probably did the right thing taking your money out. You obviously didn’t know that it could go down that much (and $4,000 to $3,700 is not necessarily a bad investment choice in the recent markets, by the way), your risk tolerance is likely currently very low, and it’s always good to understand the investment vehicle before you invest. In light of that, you probably did OK taking out your money. However, with some education and better expectations, please don’t take this and shy away from future investing.

[Guest ctfudge07]

Thanks - I'll answer on behalf of both of us. Didn't mean to imply that we think investments always increase. I meant that people like to HOPE that they will. Human nature.

We do understand about ups and downs, short and long term, and as for risk tolerance - you don't want me to get into some of the things we've done lately, trust me. Risk tolerance is far from low - in fact, we're working to get it to a healthy lower level in some ways and better patience on the other side (who knows what will happen this week but I"m tending toward thinking we should have been brave enough to ride more of this out.) We're past the Kiplinger's magazines stage - didn't mean to appear to be green thumbs, just not really familiar with IRAs.

Thanks!

p.s. Actually bordering on regretting having sold the investments right now (didn't withdraw any money, it's still in the account as cash) but it wasn't really a terrible move, either. Probably will end up being a sideways move, more or less, and at least we're learning, with a relatively un-harsh lesson this time. We're actually pretty experienced at investing, but I mean inexperienced with IRAs, which is sort of silly at our ages of 46 and 41, I know. We really just wanted to know about the IRA technicalities.

[John G]

You got the right answer to the narrow question - once you put in the max for the year, you are "maxed out" and can not contribute more. Also note that max limits do notch higher some years, and when you hit age 50, you get a "make up" boost. And, yes, you can put in more on Jan 1 of 2008.

On investing.... especially for a broader audiance of readers beyond the couple that posted:

Between July 19 2007 and mid August, we saw a nasty 10% correction in the overall markets and a lot more than that in anything associated with mortgages, finance, brokerages, home building, etc. No one should be surprised that their mutual funds or stock portfolios are 10% lower.

Some folks with cash have been buyers... just as others have made panic sells. I got caught in this sell off like many others, but after two weeks, I was moving cash over to equities... not at the bottom, but at "sale" prices for some very good companies. People who act on extreme fear or unbridled greed rarely get it right. The first are selling when they should be buying - - something about "buy low" seems to be forgotten. The second are chasing last years, months or weeks hot performance and greed drives them to join the crowd. Unfortunately, prior performance truly is NOT connected to future performance. The folks that join late are likely to be "buying high" and staying too long.

I am responding to the concept of "panic". I don't mean to encourage folks into thinking they can time the market changes. I've never met anyone who successfully did this over the long haul. Lots of folks make claims, most bring up performance after the fact. (Like we don't actually know who won the Super Bowl last year... how about telling me who is going to win THIS year!)

But, I do like to buy when there is a whiff of panic in the air, when talking heads are sounding alarms.

[Guest DaveXxxx]

That is all great advice. We have actually used this "sell-off" as an opportunity to re balance our portfolio and load up on the funds we really like, while they are on sale. Now we are back in for the long haul, with a few bruises but hopefully a little bit smarter.

[Guest ctfudge07]

John - are you sure it was only a "whiff" of panic in the air? I'd say it was more like a smelly, stifling fog hanging in the air.

If you spent two weeks regrouping, you must have made out OK. A friend of mine sold out on the LOWEST day, that great big slide. I think she feels dumb now but also feels like a lesson has been learned. She is back in the saddle now.

Nothing like actually making a mistake to learn a lesson, but I understand that it was hard to keep chins up this time, for just about everyone.

[John G]

Yes, perhaps a lot more than "whiff". When normal folks endure a week or two of bad news and then pull the plug, I think you can call that more than fear... panic.

I can't report any genius type moves by me. I was slowly building a cash position in the second week of August and had gotten to about 25% cash. But, as the market retreated, I was seeing opportunities and buying. Now if I had just waited about 5 days longer, then it would be an amazing decision. I just looked at the six new or additional positions that I took in the past two weeks and every one of them is up 2-8%.

I am not recommending that folks go the stock picking route - it takes time, requires analytical and math skills and you have to enjoy the signficiant research requirement. I spend about 20 hours a week scanning sources. I read SEC filings, newswire articles and listen to almost every quarterly conference call. That is a lot of hours because I actively track about 60 stocks in 10 sectors and hold between 20 and 30 stocks.

When everyone in the media is pitching doom and gloom, you want to start thinking about being a buyer. The folks you see as talking heads (and many in print journalism) know very little about economics and investing. They are in the business of selling a story - and recently that has been the sublime suprime meltdown. (Running neck and neck with bad products from China) As with many things, the headline hype vastly overstates the extent of the problem. "Talking Heads" is really a derogatory term.

A few extra comments about "research":

One of my daily reads is www.valueforum.com which is a fee based site with a couple of thousand members. There is no flaming, minimal touting (a few claims of credit which are well diserved), no vulgarity... basically lots of beef and not a lot of fluff. It is 10x better than any free message board I have ever visited. I suspect that about 50% of the membership are millionaires, and we have perhaps a half dozen folks that work or own hedge funds. This group focuses on dividend paying stocks, resource companies, basic materials, transport/shipping, REITS, financials, and with only a small amount of technology. This is a stock pickers message board. Folks are welcome to visit and for a modest fee, try a trial membership. VF was created by some 20 something geeks, but it seems like most of the members are a few decades older. You can "lurk", but a site like this works best when members find some way to participate. (Disclosure: I have no financial affiliation with this group.)