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When Is The Best Time To Put Money In Your IRA?

This article is more than 6 years old.

Funding an IRA comes with an endless amount of questions. What kind of IRA should you contribute to, Roth or traditional? What should you invest in once you make your contribution? The most recent question I've encountered is: When should I make my contribution? In years past, I've made my contribution for the previous year right around tax season, meaning I made the maximum contribution for 2015 in April 2016. However, this year, for the first time, I made my contribution at the beginning of the year, so my 2017 IRA contribution was in my account by February of 2017. Of course, this means my contribution will have longer to appreciate than if I were to make the contribution at the end of the 2017 calendar year. There is also the argument that neither of these maneuvers is correct, and instead, I should be contributing the same amount every month ($458.33) in order to max it out by the end of the year. To find out what the "right" answer is - or if there even is a right answer - I asked seven financial experts when the best time to contribute to your IRA is. Here's what they had to say:

The expert: Kimberly Foss, CFP, is the author of Wealthy By Design: A 5-Step Plan For Financial Security and the founder of Empyrion Wealth Management, based in California.

Her verdict: My number one piece of advice for IRA investors is, of course, to make contributions every year of eligibility. The biggest mistake investors make is failing to contribute at all! Sometimes, cash flow can be a temporary problem, but even if you can’t put in money every single month, you should make every effort to contribute at least once a year to your IRA account. For many people, an annual contribution is the most practical solution because of the way their income/expense cycle works. For others, monthly contributions are easier to budget and maintain. Either way works, and in both cases, over time, the dollar-cost averaging (DCA) effect will usually work in the investor’s favor. But the most important thing is consistent, periodic contributions on whatever interval the investor can maintain with consistency.

I advise my clients to take maximum advantage of DCA. Typically, retirement account clients who are making annual contributions to their accounts have a longer time horizon, and over time, DCA almost always lowers the average price paid for any investment, since it tends to mean investors purchase more shares when prices are lower, and fewer shares when they are high. To gain the maximum benefit from DCA, a client would be better advised to contribute to the IRA on a monthly basis. So, for a client who is making the maximum annual contribution of $5,500 (for clients under age 50), it makes more sense to divide that into 12 monthly contributions of $458.33, rather than just putting in $5,500 once a year. Monthly contributions get the maximum DCA effect over the course of the year and, thus, over time, the client tends to own shares at a lower cost.

The expert: David Hays is the president and founder of Indiana-based Comprehensive Financial Consultants, Inc.

His verdict: I think it depends on how much money you already have in an IRA.  If this is your first, second or third year of investing, I would put half in now and the other half in monthly, over the next six to nine months. So if we have a sell off, you are able to buy more shares with the same dollars, and if the market goes up from here, you had a good amount in already, so you participated.

If you already have a larger established IRA, I would put it all in during the first month of the year. Contributing $458 a month over the course of a year, with a $100,000 IRA, wouldn’t buy enough shares in a downturn to make a real difference in the overall account balance. Another mistake I see is trying to time the market. Is the market too expensive right now? Should you wait? No one knows for sure, and it’s been shown over and over, you can’t time the market, it’s the time in the market that matters the most.

The expert: Jane Hwangbo is a former multi-billion dollar hedge fund manager and the founder of MissionOverMoney.com.

Her verdict: This is a question that trickily enough requires an answer to another question – “What else could you do with your money, besides contributing to your IRA?” Keep in mind that the IRA money would be pre-tax value, whereas most other options of what you could do with your money, would be post-tax, so worth less on an apples-to-apples basis.

If you have any high-interest debt, not paying down the debt is probably your most expensive option, so I would contribute to my IRA at the end of the year and get rid of the debt first.

If you have low-interest student loans, I would contribute to the IRA all at once at the beginning of 2017, so that the power of compounding and time can boost your returns as much as possible in the long run.

The expert: Travis Sollinger, CFP, is the director of financial planning at Fort Pitt Capital Group in Pittsburg.

His verdict: In my opinion, the best time to deposit money into your IRA is as early in the beginning of the year as possible, preferably the first few weeks of January. The reason: I’m playing the odds that you tend to find lower prices at the beginning of the year. The Golden Rule of investing is to “buy low and sell high” and without a crystal ball, none of us know where the stock market is headed in any given year. Historically, markets tend to go up seven years out of every 10 and down the other three years (on average). So by investing early in the year, you potentially have a 70% chance to invest before stocks have a chance to appreciate. If it is one of those years when stocks go down, you would be better off investing in your IRA at the end of the year. The problem is: no one knows this until after it has already happened. For the truly risk averse clients, I suggest dollar cost averaging throughout the year. By investing $458 each month, you increase your opportunity to invest when the market declines within the year.

The expert: Michael Keeler, CFP, is the CEO of Peak Financial Solutions, a Las Vegas-based financial planning firm.

His verdict: If you can afford to put $5,500 into your IRA at the beginning of the year without going into your emergency fund, by all means, do it. You will have completed a big step towards your retirement by funding your IRA.

However, the vast majority of people aren’t able to do this, so they put money in on a monthly basis. If you contribute around $458 a month, you will max out your IRA contribution over the year. This is setting your contributions on auto-pilot and is a great way to make sure your IRA is funded.

Waiting until the end of the year or until you file your taxes is a poor choice. Procrastination is the number one enemy of financial planning. People who wait often find that the money isn’t there when it is time to make their contribution.

The expert: Don Riley is Chief Investment Officer at Wiley Group based in Pennslyvania. He has more than 30 years of client experience.

His verdict: It’s best to put the $5,500 ($6,500 if you are over age 50) in your IRA at the beginning of the year. The first reason is you receive immediate benefits from the deferral of income generated by the investments. Typically that income would be taxed at your personal income tax rate, but now it can be deferred and allowed to compound. If we assume a portfolio of stocks and bonds, then investing at the beginning of the year gives your money more time to grow tax deferred. That appreciation or growth can also be compounded. Should stocks do really well (as they have in the first quarter of 2017 where the S&P 500 returned +6.1 percent), a portfolio can be rebalanced without capital gains tax implications.

The expert: Nancy Coutu, CFP, is the co-founder of Money Managers Financial Group in Chicago.

Her verdict: The best time to fund an IRA is January 1st of the tax year. If the money is sitting in an interest bearing taxable account, you will lose some of the earnings to taxes. If instead, you put the money into an interest-bearing, IRA it will earn the same interest tax-deferred. This could save you over $100 per year. Also, contributing early in the year could help you to accumulate thousands of dollars more in the long run. Remember, you have 15 months to fund the IRA and if you qualify, choose a Roth IRA over a traditional IRA. A Roth IRA offers more flexibility even though the contribution is not deductible, over time and you could net thousands more dollars by it accumulating tax-free.