I am trying to decide if I should make this year's IRA contribution all at once at the beginning of the year, or if I should space out the contributions throughout the year.

If I make it all at once then it will start growing tax-free slightly earlier.

Is it in any way safer to spread out the contributions? What makes more sense?

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    Did you make the 2014 contribution yet? – mhoran_psprep Feb 23 '15 at 11:07

This is essentially a question about timing the market, which is pretty much doomed. The problem is that most investments don't just go up as if they paid interest regularly. They fluctuate. If you put $6000 into stocks at the beginning of the year and the stocks go up you feel good. If they go down you kick yourself for not holding off. So pick a strategy that matches your cash flow and don't pay attention to the short-term swings.

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    Yes, I think I'd use the "dollar cost averaging" approach, and spread out the contributions. – Peter K. Feb 23 '15 at 13:19

If you put in $6000 now and let it grow, as opposed to $500 per month, then you have two outcomes. Using my trusty 12c I assumed these scenarios had an annual interest rate of 10 percent and were over a period of 40 years.

  1. Invest incrementally. Periods = 12*40 = 480 Interest = 10%/12 = 0.833% PMT = (500) PV = 0 FV = $3,162,079

  2. Invest $6000 today (2-a) and invest 39 years at incremental levels (2-b).

2-a. Year 0 to 1 Periods = 1 Interest = 10% PMT = PV = (6000) FV = $6,600

2-b. Year 1 to 40 Periods = 12*39 = 468 Interest = 10%/12 = 0.833% PMT = (500) PV = (6600) FV = $3,177,549

Answer: Scenario 1 results in a ending value of $3,162,079 and scenario 2 results in an ending balance of $3,177,549. A difference of approximately $15,380 in favor of scenario 2

I got some bigger differences when I accounted for just the accrued interest in the first year, not sure why right now. But bottom line is, if 15-30 thousand dollars is more valuable 40 years from now, then sure, why not?

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    The difference between your two options is $15k, but compared to your result of $3.2M, this difference is insignificant. – Ben Miller - Remember Monica Feb 23 '15 at 12:39
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    This answer assumes a consistent 10% rate of return. No fixed rate investment available today can provide that rate for such a period of time. – Kent A. Feb 23 '15 at 14:23
  • I agree. Forecasting anything for the length of 40 years is ridiculous. I just think the math is interesting. And yes, the amount we're talking about is immaterial. Thanks for the feedback :) – Mark R Feb 24 '15 at 8:45

One thing that you may need to consider is whether or not you're expecting to receive more income than the limits that allow you to receive tax benefits when contributing to an IRA. If you are close to the limit and unsure what your adjusted gross income will be for the tax year, you may end up not being able to take a tax deduction for a traditional IRA contribution or you may end up having to pay a 6% penalty if the excess contribution is to a Roth IRA as documented here.

If there is any doubt on how much your income will be for the year and you're considering contributing early during a tax year, it might be worth holding off on the contribution until you're sure what your income for the year will be.

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