Is There an Advantage to Fully Funding a Roth Early in the Year?

Vicky asks if she should fully fund her Roth IRA at the beginning of the year or over the course of the year. Dave explains.

QUESTION: Vicky asks if she should fully fund her Roth IRA at the beginning of the year or over the course of the year. Dave explains.

ANSWER: Generally speaking, at the beginning of the year just as fast as you can because you figure the market’s going to come up on average in a given year. If the market went down during that year, then you would’ve been better off to do it the other way.

If it bothers you that the market is going up and down and you sit and fret over it, pull up the market every day, and if you watch the nightly news and worry about the Dow Jones industrial average, then just fund it evenly a little bit per month, and then you get the benefit of what’s called dollar-cost averaging.

On average—mathematically—throughout the history of the stock market, the sooner you invest, the better. And the more you invest, the better. In other words, you’ve got that whole year for all of that money to grow instead of one-twelfth, two-twelfths, three-twelfths, four-twelfths, five-twelfths and so on. For instance, this last year, you would’ve been real happy had you put the money in in January and let it run. This year, if you had put all your money in in January, you’d be real glad—instead of only half of your money—by now. Mathematically, you’re better off, but if it scares the pants off of you or if you’re freaking out all the time, then just do dollar-cost averaging. It takes a lot of the fear out of it, meaning do it a little bit every month and then you ride the up and you ride the down. When it’s down, you’re buying cheaper shares. When it’s up, you’re buying more expensive shares. You get to see the benefit of both then.

When I get ready to do an investment, I just do the investment. Boom! Just like that. I don’t wait and drag it out because I don’t even think about it after I do it. I just do it and move on.