Roth IRA Contribution - At Once or Over Year

[Golfer99]

I'm contributing the $6,000 max to my roth each year and usually have the cash at the beginning of the year to contribute all at one. Is it best to invest the lump sum in January or spread it out over the course of the year? Like $500/month or $2000 three times a year?

[ruralavalon]

Welcome to the forum .

I'm contributing the $6,000 max to my roth each year and usually have the cash at the beginning of the year to contribute all at one. Is it best to invest the lump sum in January or spread it out over the course of the year? Like $500/month or $2000 three times a year?

If you have $6k available at the start of the year then it's probably best to invest it all at once, I see no benefit to waiting and investing it with 12 monthly installments or any other schedule.

I always invested whenever I had money available to invest.

[retiredjg]

What is best will vary with what the market does from year to year. Since the market goes up more than it goes down, my guess is that lump sum would be better, but not by enough to matter much.

[Kintora]

From what I have read, the historical data has shown that it's better approximately 2/3 of the time to lump sum the entire amount up front as opposed to dollar cost averaging over time.

That being said, there is an emotional factor as well. If you can't stand the thought of putting in $6k at once and then possibly experiencing a drop for some period of time, you may want to dollar cost average. The flip side of that coin is you could dollar cost average and the market keeps going up, up, up and you are buying at higher and higher prices.

The longer you plan to leave the money invested, the less it probably matters in the end.

I lump summed $3,550 into an HSA in January and then watched the markets dive. They eventually came back and then some. No regrets.

[pasadena]

As long as you have the money available at the beginning of the year, I feel like it's best to lump-sum it and be done with it. As for front-loading vs DCA vs back-loading, honestly, one is always going to be better than the others in a single year, but there is no way to know which one will be the winner. "Historically", front-loading comes out on top more often, because "historically", the markets tend to go up. But that's not true every year.

I personally try to save the money for next year during the last quarter, then contribute it all in January. If for some reason I was unable to save the whole thing ahead of time, then I take the money out of my EF and replenish it later.

Note that if you're doing a backdoor Roth using conversions, DCA'ing all year can be more of a hassle than if you're doing regular contributions, especially when trying to get all the steps in as fast as possible to avoid taxes.

[UpsetRaptor]

Lump sum beats DCA 75% of the time. So I always lump sum, because I like being right 75% of the time.

[Eagle33]

If one steps back to the 50,000 ft level, one can see that annual contributions is a form of DCA. That is why I am a lump summer - 100% invested. Bonds are my "damp" powder.

[Tony-S]

My $7,000 contributions are made on January 2 each year (or the following Monday if it’s a weekend). The data are clear; this leads to greater returns than DCA.

[terran]

As others have pointed out lump sum beats DCA. Then again, the fact that you have $6k available at the beginning of the year means you've been saving that money up during the preceding year, so perhaps you'd be better investing it in taxable even sooner? Do you invest in taxable currently or are all your retirement savings going in tax advantaged accounts? If you're not yet contributing to taxable I wouldn't start, but if you do invest in taxable then you'd probably be better off investing the Roth money and then contributing to Roth as you have new money available throughout the next year.

[TropikThunder]

I'm contributing the $6,000 max to my roth each year and usually have the cash at the beginning of the year to contribute all at one. Is it best to invest the lump sum in January or spread it out over the course of the year? Like $500/month or $2000 three times a year?

Diversification is good: I lump sum my IRA and HSA as soon as I can in January, in part because my 403b will by it's nature be spread out over the year. So, some of my money is lump sum, and some is DCA (although contributions via payroll aren't really DCA since you don't have all that money at one time).

[ruralavalon]

As others have pointed out lump sum beats DCA. Then again, the fact that you have $6k available at the beginning of the year means you've been saving that money up during the preceding year, so perhaps you'd be better investing it in taxable even sooner? Do you invest in taxable currently or are all your retirement savings going in tax advantaged accounts? If you're not yet contributing to taxable I wouldn't start, but if you do invest in taxable then you'd probably be better off investing the Roth money and then contributing to Roth as you have new money available throughout the next year.

Having $6k available to invest in an IRA in January may instead mean that you received a year-end bonus in December.

I would not endorse the idea of saving up throughout the year in order to fully fund an IRA and in January of the next year.

[fabdog]

The only caveat... and sounds like it does not apply to you... you need to be sure you'll have the $6K of earned income for the year...If you put it all in in January and then have an issue and don't make $6K... then you have to re characterize

Mike

[PoppyA]

It’s like daylight savings. Cutting one end of the blanket off, and sewing it on the other end. Makes no difference.

[keystone]

I've always used uneven cash flows during the year to fund our Roth accounts despite having enough in our taxable account to fund the entire amount in full in early January.

I have no reason other than I don't like making withdrawals from our already invested taxable account. I might have come out ahead by funding in full at the beginning of each year, however I suspect the difference is immaterial.