When to max out your Roth IRA contributions


My intuition isn’t always correct, and I enjoy being confronted with facts that don’t back up my assertions. And this post is one of those situations. Sort of.

So let’s talk about funding your Roth IRA, and assume you can max it out. As of this year, unless you hit certain income restrictions, you can contribute $5,500. (If you’re 50 or older, you can contribute $1,000 a year more.)

So that’s the maximum you can contribute over a year. Now the question becomes: when in the year do you perform this investment?

The answer isn’t so straightforward.

One option: Monthly

Monthly seems like a good option. Like all budget line items, you can count it as one of your bills and add it to your list of automatic payments.

This is what I’ve done for a few years now. It’s very simple. And it also takes advantage of what is known as “dollar-cost averaging” which is a fancy way of saying that you benefit from both the ups and downs of the market over time.

And in fact, on RothIRA.com (a site one would assume to be an authority on such things), they suggest as much.

Another option: One lump sum

The other option one has when maxing out a Roth IRA for the year is a single lump sum payment. If you happen to have the money (though frankly that’s a big “if”), you can put everything in for the year at once.

As for when, the beginning of the year would seem the best to me. After all, the sooner you put money in the market, the longer you have to let the market do its thing.

But on the other hand, with larger, less frequent payments, you would miss out on dollar-cost averaging. All the ups and downs of the year would be lost. If you invest in January and that’s the high point of the year, you’re in good shape, but if you invest in January and it’s the low point of the year, that’s hard to swallow.

So, my gut would say to not do it. Stick with monthly.

Vanguard speaks out

But then Vanguard weighed in. In a paper tellingly titled “Dollar-cost averaging just means taking risk later“, Vanguard argued (emphasis mine):

“On average, we find that [a lump sum investment] approach has outperformed a [dollar-cost average] approach approximately two-thirds of the time, even when results are adjusted for the higher volatility of a stock/bond portfolio versus cash investments. This finding is consistent with the fact that the returns of stocks and bonds exceeded that of cash over our study period in each of these markets.”

Yikes. Two-thirds of the time? Is my gut feeling wrong two-thirds of the time? Is it time to change my investment schedule?

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At first blush, this makes sense. I mean, wouldn’t you want to get your money into the market as soon as possible, rather than have it sitting as cash?

Well, yes and no.


Hidden on page 4 of the above article is a box that pretty much torpedoes the issue as far as we’re concerned (emphasis mine again):

“To some readers, our research may seem to discount the benefits of dollar-cost averaging…Most popular commentary addresses DCA in terms of consistent investments made using current income—i.e., an employee transferring a portion of each paycheck into a retirement account. In that case, investable cash becomes available only in relatively small amounts over time, which makes DCA a prudent way to invest…Our research, in contrast, focuses on the strategies for investing an immediately available large sum of money. Here, the average performance results have favored lump-sum investing.”

There’s a lot to take in here, but I can distill it:

  • If you have the money to max out your Roth IRA at the beginning of the year, then it is more likely to be advantageous to do so.
  • If you can’t max out your Roth IRA in a lump sum, it doesn’t make sense to save up until you do. Instead, regular contributions are more likely to be better.

I don’t know about you, but I don’t have $5,500 in spare money in my budget. So I’m going to continue to invest monthly, as I always have.

But if I were to get a lump sum payment of that much, it makes sense to invest it as soon as possible.

(This speaks to the importance of reading an entire research paper rather than just the abstract.)

What if you can’t max it out?

Not everyone who can invest in a Roth IRA can max it out. When I started my first Roth IRA (years ago) I came nowhere close to maxing out my contribution for the year. That’s fine.

If you can’t max out your Roth, I’d just fund it when you can. Sometime is better than never, always.

But enough about me. Do you max out your Roth IRA? When and how do you do it?

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