Recently, I've been looking into investing into a Roth IRA since I'm in the lower end of my twenties. Due to no employer match and feedback from co-workers, I felt this would be a good option to ensure a proper retirement. I've scouted out my expenses over the years and it brought up a curious question.

I'll preface by saying I'm not adept at investing into either 401K's or Roth IRAs. I understand the core differences at best, but beyond that I'm financially a novice.

A good way to phrase my question would be:

If I contributed $5500 the first day applicable for 2015, or, I contributed $5500 the last day applicable for 2015, will contributing earlier mean more interest and, in the long run, a larger retirement fund?

(i.e. Does the interest for investing take place after that year's over with or 'monthly' in a sense?)

I tried looking for similar threads, but this one is the only one I could find. It didn't seem clear to me from its responses, so I apologize if they are truly that close to what I'm after.

  • 2
    A Roth IRA can be as simple as a special bank account that pays x% and can change every week; or it can be a special CD that pays a different rate depending on the length of the CD; or it can be an investment in a mutual fund which can gain or lose money on any given day. Unless you are thinking of the savings account or CD there is no concept of interest. May 10 '15 at 0:35
  • Not an answer to your question, but it's most beneficial to contribute the maximum you can every year, and start as soon as possible. Once a tax year has passed, you can't retroactively contribute to it. When you contribute during that year is sort of less important.
    – user117529
    Oct 20 '17 at 1:31

Does the interest for investing take place after that year's over with or 'monthly' in a sense?

It depends on your account. Specifically, how often the interest compounds. Meaning, when the bank calculates and pays it; then that paid interest becomes part of your principal and included in the next round of calculation, hence "compound". Monthly is a common schedule. Yearly is rare, despite the fact that interest rates are given as annual percentages. The faster the interest compounds, the better.

All else being equal, you will earn more interest by depositing earlier, as long as account interest is paid out with frequency other than once at the end of the year. You miss out on the intra-year payments by delaying your deposit. Over a long period of time, this will end up being a substantial difference.

  • That's very helpful to know this is commonly on a monthly schedule. I'm sensible when it comes to the "It depends." nature of things, so I will definitely verify when interest compounds before locking into an IRA. I'm sure there are many factors to consider, too, but those are out-of-scope for what I was generally after.
    – Xrylite
    May 9 '15 at 23:58

Say your Roth is invested in assets that return 8%/year on average.

Your balance 40 years hence will be 8% higher by making a Jan 2 deposit vs a Dec 31 deposit. In other words, if you were on track to hit $1M with the Dec 31 deposits, the Jan 2 strategy will return $1.08M or $80K more. $80K is good.

  • On the other hand, putting the money in more often, in smaller amounts, makes the contribution less susceptible to random spikes (or a market crash), which makes the end result more stable, which is also good, and arguably more important when it comes to retirement.
    – tomasz
    May 9 '15 at 23:24
  • @tomasz That is something I'll definitely keep in mind. My end goal was to do even monthly payments throughout the year. However, the core question I thought would be easiest to explain in the benefits of earlier vs later. Seems it comes down to balancing value vs safety in one light.
    – Xrylite
    May 9 '15 at 23:46
  • If you compare the monthly buys to the Jan 2 annual buys, the annual will beat the monthly by 4% on average. There will be years it beats by more, less, or even lags, but 4% on average, if the average annual return is 8%, as in my example. May 10 '15 at 0:59

It does typically make sense to invest as early as possible. Your gains don't necessarily come monthly or yearly, but often daily (as do your losses). It obviously depends on what you invest in how exactly the returns are paid out, but typically, assuming that markets tend to increase over time and that you can't time when it is a good or bad time to buy, you will make money the longer you hold an investment. Additionally, by getting your money in the Roth IRA as early as possible, you are avoiding taxes on any of these gains as early as possible. If you instead held an alternative investment throughout most of the year, then moved the money to the Roth, you will pay taxes on the gains in that alternative, whereas you won't pay any taxes on gains if the investment is held in the Roth IRA all year.

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