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Fund Roth IRA in One Lump Sum?

This article was written by in Investing. 13 comments.


2007 will be the first year that I could theoretically fully fund my Roth IRA on the first day of the year, rather than spread the investments out throughout the year. If I were to do this, it would present an increased risk into my portfolio. I want to buy when the market is lower, but there is a chance the fund of choice, the TIAA-CREF Small Cap Equity Index Fund (expense ratio of 0.30%), might go down next year, particularly if the market in general has a down year. By dollar-cost averaging over the course of the year, I’d be getting what is basically the average price during 2007. Less risk, but possibly a lower return.

It’s likely I’ll continue investing the same way I have been doing so the past few years: two automatic investments each month totaling $4,000 at the end of the year.

Updated September 1, 2011 and originally published December 21, 2006. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 13 comments… read them below or add one }

avatar Dus10

Does TIAA-CREF offer a no fee money market fund? You could dump it all in there and then do DCA purchases of the funds from there. That way, you get the money in, get some sort of return, and you can do DCA. Seems like a win-win.

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avatar Sun

I also think DCA is better than a lump sum investment as you never know where’s is the bottom and where’s the ceiling. For long term, the difference between investments through-out the year is very small.

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avatar klerg

hey…BIG fan of this blog…1st time commentator.

If it were me, I would fully-fund the ROTH IRA on day one of 2007 if I could. You’ll most likely pay less per share if you buy it as early as possible.

Would I buy that specific TIAA-CREF fund? Probably not. Small caps are a bit too risky right now.

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avatar Tom

Also a 1st time commenter but frequent visitor. I fully fund my Roth at the beginning of the year, but that’s because it goes into a Scottrade account. Frequent small purchases of stock throughout the year don’t make sense if you are trying to keep your transaction costs below 1%. This coming year I’m looking at one or two value stocks and TIP, an EFT that holds Treasury Inflation Protection bonds and pays a decent monthly dividend. The three trades will cost $21 ($7 ea.), which divided by $4000 works out to 0.525%. The one caveat is that I’ve been doing this for years and hold a number of Vangard EFTs, so my Roth is fairly diversified. Holding just a few stocks might be too risky for some, especially those early in their investing careers.

Keep up the great work on the blog!

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avatar fivecentnickel.com

At the very least, do what Dus10 suggests.

But remember… Buying it all on Jan. 2 of every year is still dollar cost averaging, just with less granularity. In this case, you’d be averaging across yearly instead of monthly purchases.

And keep in mind that, as with any risk aversion strategy, you will (on average) lose out on earnings… The market trends upward (on average), so in all likelihood it will be cost more later.

All that said, I think that dumping it into a money market in the Roth and then doing DCA from there is probably what we’ll end up doing.

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avatar jim

One thing to consider, and hopefully you have this problem, is if you find yourself getting close to the 95k phaseout range in income then you’ll have to pay penalties for over-contributing to your Roth and deal with the hassles of withdrawing some of it and settling the difference in earnings (that you accrued during the year on funds you shouldn’t have contributed in the first place).

Just something to keep in mind but otherwise I’m all for contributing in a lump sum at the beginning of the year.

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avatar Brian

Flexo, lump-sum investing has been shown to outperform DCA nearly two thirds of the time. You may be right to hold off for now, but the odds aren’t in your favor.

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avatar My Financial Journey

Every year for the last 3 years I have funded my Roth IRA and my wife’s Roth IRA in one lump sum on Jan 2 or whenever closest business day is.

Realistically it probably doesn’t matter that much as if you are leaving it in there for 30 or more years the possible loss by not DCA is probably not that great, but I found I often invested it slowly throughout the year anyway so now this year I’m only going to deposit like $2k every couple months until I get to $8k.

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avatar TJP

When dealing with Roths, time is the most important factor. More money now equals more tax free earnings come retirement.

I wouldn’t worry about DCA either. Just make sure you max out the contributions every year. If paying a lump sum is the easiest way for you and your family, then by all means carry on.

I would also suggest investing in a foreign small cap fund for 2007.

The market looks so scary right now that I’m not buying a single American stock in 2007.

A bearish market is coming. Do some research on foreign funds, and diversify your risk overseas as well as sector-wise.

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avatar Two Pennies Earned

I fully funded my Roth for 2007, but I put all the money in a money market fund. That way, I can start getting my 5% interest right away. Later, I will either purchase the index fund I want in increments each month, or I’ll end up making a large purchase all at once in order to get into a higher minimum fund that I’m finally eligible for. With the historic highs we’re at right now, it may be better to not put $4000 into a US fund right now. But of course, no one knows what the high point or low point of 2007 will be.

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avatar J.J.

If I open up a Roth IRA account now in 2008. If I contribute for 2007 can I use that contribution amount on my 2007 1040 tax return?

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avatar Luke Landes ♦127,550 (Platinum)

J.J.: Yes, you can contribute to your 2007 Roth IRA now and use that contribution on your 2007 tax return… but Roth IRAs are not tax deductible.

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avatar Llama Money

I say jump in, the water’s fine. DCA does lower risk, but it also lowers potential return. Since you’re investing in stocks ( through the mutual fund ), and you’re investing long term, I say bite the bullet and do it. A little risk for a lot of reward.

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