Should You Fund Your IRA at Once or Steadily Contribute Throughout the Year?

Saving for your retirement through one of the tax-advantaged tools available in the United States offers you a major financial boost.

Contributing to an Individual Retirement Account (IRA) is especially helpful if you don't have access to a 401(k) with a company match.

An Individual Retirement Account (IRA) gives you a chance to save up to $6,000 per year toward your retirement — $7,000 if you’re 50 or older.

Six thousand dollars is a lot of money for many people. However, on income of $50,000 per year, investing $6,000 for retirement is 12% of one’s salary. Reputable sources often cite 10 to 15% as the minimum amount of our salary you should put toward your retirement every year.

If you’re blessed to be in a financial position where you can max out your allowed IRA contribution for the year in January, should you do it?

It's not an easy question to answer, as there are many factors to consider. In fact, Forbes asked seven different financial advisors, with no clear consensus among their answers.

Here’s a look at the pros and cons of fully funding your IRA early in the year.

The Case for Contributing Immediately

When it comes to investing strategy, the trump card is compound interest. You want your money in the market for as long as possible.

"From our research, we believe that an investor that maxes out their IRA at the beginning of each year would have an additional $8,800 after 10 years compared to those who wait to make their contributions until later in the year," Betterment certified financial planner Andrew Westlin said, according to CNBC.

“That’s why we always say time in the market is more important than timing the market.”

Here’s a look at the four main reasons you may want to knock out your 2022 IRA contributions now.

  • More time in the market. By contributing your full allotment to your IRA on Jan. 1 as opposed to any other strategy, you ensure your dollars have the maximum amount of time to compound. Time in the market may be the single-most important factor when it comes to building wealth.
  • Don't try to time the market. I'll address the counterpoint to this later in this article (see No. 7). But it doesn't make much sense to hold your full $6,000 (or $7,000) in an attempt to find the perfect market entry point.
  • Guarantee you reach your limit. There's something soothing about checking your IRA contributions for the year off your list early in the calendar. Even if you can automate your contributions throughout the year.
  • Avoid low interest rates. Banks are offering historically low interest rates. Investing the money won't provide a guaranteed return. In more years than not, you'll make a better return on your dollars by investing them starting in January rather than earning 0.50% interest in a savings account.

The Case for Spreading Out Your Contributions

If you have enough money to knock out your maximum IRA contributions in the first quarter of 2022, it’s probably best to do so.

However, it may be worth considering these seven questions first.

1. Do You Have Any Debt?

Deciding whether to pay off debt, save or invest is a math problem. It’s difficult to predict investment performance. At least you know the interest your lender is charging you to finance your debt.

One thing’s for certain: people don’t get rich by paying 18% interest to Visa or MasterCard. High-interest credit card debt and a low-interest mortgage are two different things.

Consider the interest rate on your debt. At a minimum, put your money toward high-interest debt before you contribute to your IRA.

2. Do You Have an Adequate Emergency Fund?

Money expert Clark Howard says you should save before you invest. That's especially important if you're contributing to a tax-protected retirement account like an IRA that can impose heavy financial penalties for withdrawing early.

Don't let an unexpected financial expense force you to rack up credit card debt simply because you've taken money that could've been an emergency fund and contributed it to your IRA.

3. Have You Maxed Out Your 2021 Contributions?

Did you know you can contribute to your IRA limits for 2021 through April 18, 2022? If you can contribute more than $500 per month and haven’t reached your 2021 contribution limit, consider putting at least the excess money toward 2021.

4. Are You Contributing to a Traditional IRA?

Clark strongly prefers that you contribute to a Roth IRA instead of a traditional IRA, assuming you don't eclipse the income limits.

Contributing to a traditional IRA can reduce your taxable income. You can contribute only post-tax dollars to a Roth IRA, so it takes more money to reach your 2022 IRA contribution limits if you contribute to a Roth IRA.

If you have enough money to max out your traditional IRA, consider switching to a Roth IRA.

5. Are You Maxing Out Your 401(k)?

If your company 401(k) plan is relatively inexpensive, Clark says you can max out your 401(k) contributions before thinking about an IRA.

The 401(k) contribution limits for 2022 are $20,500 (plus $6,500 in catch-up contributions if you're 50 or older).

You don’t want to max out your 401(k) contributions in January, especially if you get a company match, because you’ll be risking your match.

But since the 401(k) contribution limits are more than three times higher than IRA limits, that could impact when and how much money you put into your IRA.

6. How Stable Are Your Income and Overall Expenses?

Financial uncertainty is a fact of life.

A solid emergency fund helps mitigate the risk of financial harm due to things that you couldn’t predict. But most people are more financially stable in some years than others.

If your job, health or monthly expenses are at greater risk than usual for whatever reason, you may want to consider contributing to your IRA an equal amount for all 12 months ($500 per month for those with a $6,000 limit).

That way, you aren’t tucking away all your cash into an account that will penalize you for withdrawing.

7. Have You Considered Dollar-Cost Averaging?

Dollar-cost averaging (DCA) is a popular investing philosophy. It's based on the notion that timing the market is almost always a fool's errand.

If you put in your full allotment of IRA funds and invest in January, you could be buying into the market at the highest or lowest point in 2022.

For example, the S&P 500 took a nosedive between late February and mid-March of 2020 due to the onset of COVID-19 in the United States. Investing all $6,000 before Valentine’s Day wouldn’t have been as beneficial as investing the money any time between March and mid-July.

Of course, almost no one could’ve predicted that. Spreading your entry points for your $6,000 across all 12 months can ensure you don’t invest at the worst time of the year, offering some level of risk protection.

Final Thoughts

If you’re trying to decide when to fully fund your IRA for 2022, you’re in a good position.

While the decision matters to an extent, it isn’t as important as contributing to your retirement as early as possible in life — and continuing to contribute each year.

The amount of money you put in a tax-advantaged retirement account — typically a 401(k) or IRA — also matters more.

You aren’t going to make the mathematically perfect decision, no matter how hard you try. Don’t get “paralysis by analysis” here. In most cases, if you have the means to do so, go ahead and max out your IRA contributions early in the year.

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