Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

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bo105954027
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Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by bo105954027 »

A simple question:

Maxing out contribution to Roth IRA on the first day of every calendar year, or contributing small amounts each month, which strategy do you use? Which choice will lead to better outcome?

(Assuming investment portfolio is BHs' favorite 80% stock/20% bond mixup.)
Time in market beats timing the market.
livesoft
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by livesoft »

I don't use either of those.
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Afty
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by Afty »

This is the same question as lump sum vs. dollar cost averaging. Lump sum comes out ahead two-thirds of the time. See https://pressroom.vanguard.com/nonindex ... raging.pdf.
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mhc
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by mhc »

I max my IRA contribution in early January every year. I then do a conversion to get it into my Roth. I do this because the money happens to come available in January every year. One contribution keeps this two step process simpler.

If you have the money, put it in at once and be done. If the money comes available periodically, put it in periodically. Invest as soon as possible.
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Taylor Larimore
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by Taylor Larimore »

bo105954027 wrote:A simple question:

Maxing out contribution to Roth IRA on the first day of every calendar year, or contributing small amounts each month, which strategy do you use? Which choice will lead to better outcome?

(Assuming investment portfolio is BHs' favorite 80% stock/20% bond mixup.)
bo:

Assuming you are confident that your overall stock/bond allocation is suitable, I think it is usually best to maxout your IRA contribution as early as possible. Two primary reasons: 1) The stock and bond markets usually go up during 12 month periods; 2) It is simpler.

Best wishes.
Taylor
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BL
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by BL »

If you have the money and know you will qualify either for the direct contribution or "Backdoor Roth", just put the money into the appropriate account as soon as you have it. If you really want to space it out, go ahead.

If there is some doubt about how much and whether you are qualified, wait until you know (or have done your taxes) and put it into the appropriate fund any time up until ~April 15 of the following year.
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Watty
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by Watty »

If you have relatively high income then something like a bonus could increase it to the point where you are not eligible for a Roth.
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by Index Fan »

In the long run- over decades- it matters very little.
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by Angelus359 »

I actually go further. I invest to auto max my Roth, every Monday.
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by packet »

1/2/20xx lump

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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by The Wizard »

If I was wealthy back in my full-time working years, I'd probably get it all done in January, yes.
It's only $6500 for older folks, not a large amount.
And you can always do a back door Roth contribution if you may possibly exceed the income limits.
Nothing lost if you don't exceed the limit some years...
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RyeWhiskey
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by RyeWhiskey »

I lump sum in January for simplicity's sake: to get it out of the way and not worry about it throughout the year. I then automate weekly contributions to my taxable account such that, if I need to cut contributions, I can do so from taxable while maintaining my tax shelters. :beer
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danaht
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by danaht »

This is an interesting question. I always try to contribute the full amount as soon as possible. The only reason not to do this is if you think you might exceed the contribution limits. If this is the case - you might think about dollar cost averaging a little every month. As it gets closer to the end of the year - you will be able to better determine the maximum amount you can contribute.
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by englishgirl »

I invest when the money is available. Which, in my case, is on payday. I get paid 26 times a year but dividing by 25 is a lot simpler than dividing by 26, so I invest on every payday except one which I skip. This year I am skipping July 29th. Woo! It's coming up!!

It's not likely to be THE best choice, but it is best for me right now.
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by elderwise »

This is a good question, and I will also be doing one shortly for self and spousal tIRA.

Guess all in - :)
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reriodan
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by reriodan »

Dump it like a taco bell burrito.
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by triceratop »

Dumping $5500 into a Roth IRA on Day 1 is not the same as making an investment decision on Day 1, as most of the respondents have assumed. (having your investment portfolio as 80/20 is not the same as having all your Roth IRA so allocated)

The correct answer to the actual question you asked is complicated, since you may not know whether you are even eligible to contribute to a Roth IRA for that tax year, until the end of the year! You may also not know whether it is the most tax efficient strategy on Day 1. However, in general most people know the answers to both of these questions.
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malabargold
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by malabargold »

Since lump sum wins 2/3 of the time and cost-averaging
wins 1/3 of the time, I lump sum for 2 consecutive New Year's
and cost average every third year.

Genius!
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by ruralavalon »

I always invested whenever I had money to invest, in my opinion there is no good reason to wait.
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by Artsdoctor »

It depends how close you are to the maximum allowable income. If there's no possible way to surpass the maximum, I'd invest in January. If you're really close, I'd wait until the end of the year.

Similar issue with an HSA. I used to invest the maximum each January but when I realized I know longer had control of insurance plans, I now invest monthly.

You can undo both if circumstances change, but it's a pain in the butt.
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by zaboomafoozarg »

Index Fan wrote:In the long run- over decades- it matters very little.
Exactly, it doesn't really matter. I calculated the difference between yearly vs. monthly over a couple decades for different time spans, and it never seemed to make more than a few percent difference in total returns. And one was not consistently better than the other.

So I just do it at the beginning of the year. I have considered doing it on my birthday, but I can never wait.
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by FB01 »

danaht wrote:This is an interesting question. I always try to contribute the full amount as soon as possible. The only reason not to do this is if you think you might exceed the contribution limits. If this is the case - you might think about dollar cost averaging a little every month. As it gets closer to the end of the year - you will be able to better determine the maximum amount you can contribute.
Why can't you do Backdoor Roth IRA in January if you feel you income is going to increase?

-JR
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heyyou
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by heyyou »

Not what you ask, but:
Long ago, there was an IRA table (VG?) that showed that investing on the first trading day of the year, for your entire career, produced one more year of returns, than using the last date annually. After 30-40 years of contributions, each annual return on a six digit IRA is a noticeable amount of money.
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by navyitaly »

One thing to think about is for those folks that like programs like Chase Private Client, etc (high priced concierge programs)..if you do it first of year..just buy an ETF and pay the $20 and no other fees from those programs...that's the cheap way of doing those programs.
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by randomizer »

"Time in the market beats timing the market."
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by grabiner »

Afty wrote:This is the same question as lump sum vs. dollar cost averaging. Lump sum comes out ahead two-thirds of the time. See https://pressroom.vanguard.com/nonindex ... raging.pdf.
Actually, it isn't the same issue. If you are dollar-cost averaging into the market, it's still better to put the $5500 into the Roth IRA in January; any money in bonds in the Roth IRA awaiting a move to stocks grows tax-free.

But unless this is your first Roth investment, it doesn't make much sense to dollar-cost average such a small amount. The reason to dollar-cost average is psychological, increasing your risk gradually. If you have $50K in your 401(k) and Roth IRA, the difference between putting the whole $5500 in stock and bonds is less than 10% of your portfolio.
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by Angelus359 »

Statistically Monday is the only day of the week stocks go down more often than they go up. I get paid every 2 weeks but I wanted to attempt to take advantage of this possibly non existent benefit so I invest every Monday simply because A: I have the money then, B: I might do better by doing it this way than every 2 weeks, C: I believe it will help me avoid spikes
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Taylor Larimore
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Monday. From best to worst.

Post by Taylor Larimore »

Angelus359 wrote:Statistically Monday is the only day of the week stocks go down more often than they go up.
Angelus359:

This is a quote from the 2116 Stock Trader's Almanac:
A dramatic reversal occurred in 1990--Monday became the most powerful day of the week.
"The market-timers Hall of Fame is an empty room." -- Jane Bryant Quinn

Best wishes.
Taylor
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by Toons »

First Day you can invest do it,max out.
I did that for our Roth Iras for 14 years.
Bull or Bear Market it did not matter.
The market is higher now than at anytime I contributed.
It did what it was supposed to do.
Compound ,,,,via :
"Time In "
The market.

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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by danaht »

FB01 wrote:
danaht wrote:This is an interesting question. I always try to contribute the full amount as soon as possible. The only reason not to do this is if you think you might exceed the contribution limits. If this is the case - you might think about dollar cost averaging a little every month. As it gets closer to the end of the year - you will be able to better determine the maximum amount you can contribute.
Why can't you do Backdoor Roth IRA in January if you feel you income is going to increase?

-JR
Yes, I think the back-door Roth is a good option in this case if you don't have any significant pre-tax IRA accounts.
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by Dandy »

In general lump sum early. A max contribution of $5,500 for most people isn't enough to worry about. For large amounts I would DCA a portion when equity markets are at or near market highs.
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by cherijoh »

FB01 wrote:
danaht wrote:This is an interesting question. I always try to contribute the full amount as soon as possible. The only reason not to do this is if you think you might exceed the contribution limits. If this is the case - you might think about dollar cost averaging a little every month. As it gets closer to the end of the year - you will be able to better determine the maximum amount you can contribute.
Why can't you do Backdoor Roth IRA in January if you feel you income is going to increase?

-JR
If you are eligible for a regular Roth, you don't want the hassle of a back-door Roth. No Form 8606 with a regular Roth and no separate 5-year rule to keep up with. There have been 2 separate posts in the last 10 days to 2 weeks about getting letters from the IRS for Back Door Roth's gone bad.
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Re: Dump $5500 to Roth IRA on Day 1 of every year or split contribution to 12 months?

Post by Alan S. »

If you contribute to an existing IRA monthly, and the markets gain 10% during the computation period defined here http://retirementdictionary.com/definit ... butablenia, then on average your actual gain in the IRA would be half to perhaps 2/3 of that 10%.

But if you don't qualify due to income and have your contribution returned to you, the computation period for all your contributions starts with day 1, long before most of the money had been contributed. For example, if your 5500 contribution gains 10% due to total gain in the IRA, your actual gain on the contribution may be 300, but 550 will be returned to you subject to tax and penalty. Effectively, this removes 250 more from your Roth IRA than you contributed, and you are also taxed and penalized on the 550.

Also, if you recharacterized your contribution as a non deductible TIRA contribution instead of having the contribution returned, the 550 would be transferred to a TIRA. It would not be taxable, but still would swipe 250 more from your Roth account than the contribution actually gained.

So if you plan to make several intermittent contributions, consider contributing to a new Roth IRA account, not an existing one. That way, the transferred or returned amount will be limited to what the account actually gained, not what IRS computation rules require when an existing IRA receives the contributions. OR, make a single contribution to avoid this distortion.
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