Make Roth Contribution all at once or monthly

[rjpatt]

I just opened my Roth IRA and deposited 4k for 2006. I plan on depositing 4k for 2007 as well. Do most people on this board make a lump sum deposit in January or make monthly contributions to their IRA. I realize that by making a lump sum contribution, you are sheltering the money longer but monthly contribuions take advantage of Dollar cost averaging. Thanks for your help. I am only 20 years old if that makes a difference in the decision.

[sgeeeee]

There is some advantage to making a lump sum contribution as early as possible. The thing that is most likely to make you financially independent is disciplined spending and time in the market. The earlier you make the contributions, the longer the time in the market. The downsides of making lump sum payments early are the risks. If something happens during the year and you need those funds for an emergency, it can cost you. If the market falls dramatically the day after you invest, it can take years to recover. etc. So the decision you have is a risk-reward tradeoff. There is no right answer.

Good luck.

[TromboneAl]

I always DCA'd in over the year. But were I doing it again, I might lump sum on Jan 2. The earlier you invest, the more tax-sheltered compounding you get.

[samclem]

One hybrid approach is to make a monthly contribution to a taxable account in advance of next year's Roth IRA contribution. Then, in January put the whle amount into your IRA for the new year. This let's you put everything on autopilot for 11 months, requires just one manual transaction, and maximizes tax-deferred growth.


Actually putting the money into the IRA account is the most important thing, IMO. The simplest way to do that is to simply DCA every month into that account, especially if you'll be tempted to time the market rather than plunge ahead with a big deposit in early Jan every year.

[Coach]

rjpatt, I just lump sum it in in January. I DCA all my other investments, but I like to get the Roth done. I'm happy to trade the extra return for the risk.

Coach

[Gumby]

I typically receive my yearly bonus payment in February, at which time the young wife and I contribute the max to each of our IRA's. We then DCA into taxable accounts (as well as 401k/403b) for the rest of the year.

[Nords]

Originally Posted by rjpatt

I realize that by making a lump sum contribution, you are sheltering the money longer but monthly contribuions take advantage of Dollar cost averaging.

Although the IRS doesn't forbid making IRA deposits ahead of actually earning the W-2 income, someone with low or part-time income would want to make sure before the end of the year that their W-2 income would match or exceed the IRA contribution that was made way back in January.

[SLC Tortfeasor]

I DCA. Money goes from my checking account to my Roth at Vanguard every week. By the end of the year, I've effortlessly hit my maximum.

[peggy]

We transfer $666.66 each month into our Roths. We *could* and probably *should* do the lump sum in January, but I'm just lazy enough that I like the convenience of the automatic transfers.

[VoyT]

I just do it in one lump sum to get the advantage of the compounding .... and to get it out of the way.

[Empty Pockets]

I send in $1,000 quarterly each for my wife & myself (1/1, 4/1, 7/1 & 10/1.). I'd send it all in at once on January 1st if my cash flow would allow.

If you have the funds, don't worry about DCA. You're investing in equities because you believe they're going to go up long term.

[free4now]

If you have the funds, do it as a lump sum. Better to get the tax advantages longer than to get minor volatility reduction from DCA.

[JustCurious]

I don't know what most people do, but I DCA every month using automatic transfers from my checking. Very easy, relatively painless, and I like not having to think about it. Oh yea, many financial experts say Dollar Cost Averaging is the way to go.

[Alex]

LUMP LUMP LUMP!!!!

[Goonie]

Originally Posted by JustCurious

I don't know what most people do, but I DCA every month using automatic transfers from my checking. Very easy, relatively painless, and I like not having to think about it.

Ditto here! I like easy & painless! That's how my ROTH is set up, too.

However, since I'm FIREing in April, I will ALSO do some lump sum this year, to get in on the "catch up" contribution for '06 (in the short 'window of opportunity' between my 50th BD and April 17th deadline for '06 contributions), and also lump sum to max out my '07 contribution. The lumps will come from part of the chunk of change I get from my ER buyout!!!

After those final ROTH contributions, I'll probably DCA into some other TRP or Vangard taxable fund....BTW, I'm open for suggestions in this area. I haven't NOT had viable income income since I was a teenager....this whole unemployed loafer pension thing will be all new to me.

[rmark]

I dollar cost average by default - I invest monthly when I get paid. But if I had enough to contribute as a lump sum, I would. The supposed advantages of dollar cost appears to be based more on carefully layed out examples in books, than a consistent real life benefit. If you want less volatility, invest more conservatively.

[JustCurious]

Originally Posted by rmark

The supposed advantages of dollar cost appears to be based more on carefully layed out examples in books, than a consistent real life benefit.

I disagree. If you want a real life example of the benefit of DCA, look no further than last year's stock market. The DJ Wilshire 5000 (which represents the entire market) started out the year around 13,000, then went up to about 13,500 in May, but then dropped to below 12,500 by July, and then....went all the way BACK UP to over 14,000 by the end of the year!

If you had put all of your money in the market in January, your return would have been much lower than someone who DCA'd throughout the year, because the DCA person would have purchased shares at much lower prices during the summer, and the return on those low shares would be much higher than the shares bought at the beginning of the year. This is real life.

[Nords]

Originally Posted by JustCurious

This is real life.

Yes, but your one-year example could also be construed as data mining.

Long-term studies have shown that DCA loses out to the market's tendency to rise two-thirds of the time. DCA's biggest advantage to investors is its disciplined "set & forget" periodic investments that avoid the temptation to market time. So DCA works by sidestepping investor psychology, not by "buying more shares when the market is down".

Value averaging is a different story. There you literally are only buying more shares when the asset is lagging.

[Sandy]

We had always waited until the end, to see what what left over. Surprise, surprise, we tended not to feel we had anything left beyond emergency cash needs.

Now we changed our emergency needs concepts and put fund both of our Roths in Jan. We DCA into our deferred accounts throughout the year, since that comes directly out of each pay check.

[Nords]

Originally Posted by Sandy

We DCA into our deferred accounts throughout the year, since that comes directly out of each pay check.

IIRC that needs to be done to make sure that you obtain the full employer's match throughout each of the year's pay periods.

Otherwise the stock market would see one heck of a January effect as everyone attempted to fully fund their 401(k)s and IRAs...