When I transfer money to my Roth IRA account, it keeps it in a cash account until I invest it (doesn't do it automatically). It takes me around 6 months to get to my $5500 limit. Is it better to invest once after I've reached the limit or invest every time I transfer money?

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    Regular small transfers would prevent the "oh I really want a new gaming computer and I have $5,000 in my savings..." impulse. – ceejayoz Dec 7 '16 at 14:57
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    I don't think OP is suggesting keeping the $5500 in a spendable account; my reading is that the amount is contributed over time to the IRA account, but OP is asking whether to purchase shares of whatever the IRA is invested in immediately with each contribution or to let it sit in the IRA's cash fund until the full $5500 is contributed. – Joe Dec 7 '16 at 15:06
  • Joe is correct - the money isn't readily available to me while I'm waiting to get to $5500. I'm good about not spending money earmarked for investing, so I don't have an impulse issue. It's more about - am I losing out waiting 6 months to invest, or am I stupid to spend the fee to invest every time I contribute (twice a month)? – Paul Erdos Dec 7 '16 at 21:48

This depends on the terms and conditions of your IRA account, and those of the investments you have chosen.

In general, you are better off investing as quickly as is feasible given those terms. Money in your cash account doesn't earn much of a return, so the quicker you get money into something earning a return, the better.

However, pay attention to the fees and costs associated with investing. If there is a per-transaction fee, you may want to consolidate, as it may be more efficient to do so - after all, if you contribute $500 at a shot, and it costs you $5 to make a trade, you're paying 1% off the top to make that trade if you make 11 of them, versus 0.1% to make 1, so the question is do you earn that 1% back over the course of the six months? That will depend on what you are investing in.

More than likely you're going to earn more than 1% over the course of the six months, so it's probably worth investing it in pieces still in that situation, but if the transaction cost is higher, or the time differential lower, you may have a less clear-cut answer. I invest at Vanguard in their funds and have no transaction fees, so I have a more obvious answer (invest as soon as possible).

You also need to consider whether you have minimums to pay attention to - maybe your investment is something you can only buy whole shares of, for example, or you might have a much higher fee if you make small transactions. In that case, you should wait until you have the minimum to make that transaction if the fee is more than the return you'll get.

So the answer is - make the transactions as early as you can, subject to considering the fees you will pay for making them.

  • Thanks, this is what I was getting at: Is the fee per transaction worth getting smaller amounts into the market sooner? I use Capital One Investing (used to be ShareBuilder). They have a nice feature that allows you to build a diversified portfolio of good ETFs (Vanguard, Schwab, etc). But the one-time transaction fee is $18. That's why this year I waited until I hit the maximum, so I would just have to pay the fee once. But I worry I'm missing out waiting for 6 months. – Paul Erdos Dec 7 '16 at 21:50
  • Well, do the math. Assuming $500 at a pop, if you're paying $18, how long will it take you to earn that back? If you're getting 0.5% per month on average (that is 6% per annum approximately), then you're earning $2.50 per month on that $500. So maybe you should not invest that every two weeks: you won't earn enough to offset the fee. But if you collect two months' worth ($2000) and invest it at the end of February, you're now going to earn $10 per month for 4 more months ($40), so you definitely should invest your $2000 at that point versus waiting all six months, right (as $40 > $18). – Joe Dec 7 '16 at 21:56
  • You could play around with the numbers and figure out the exact optimal decision; my feeling is that you should probably invest in two or three chunks for the numbers you're describing. Thinking of this as $1000 a month, each $1000 is going to earn you $5 a month in gains; investing at the end of February or March will get you a good chunk, and then another investment at the end of the cycle (June) will get you the rest. (Or, find a better broker with no per-transaction fees.) – Joe Dec 7 '16 at 21:58
  • Really, "diversifying" into multiple ETFs is sort of silly; ETFs are already diversified, and unless you think Vanguard is going to go out of business, it's sort of pointless to diversify further (in terms of the stock market, of course diversification into bonds and such is valuable). If you want to hedge against Vanguard going out of business, just have two accounts, one with Vanguard one with Fidelity, each of which should allow commission-free or nearly so trades above a reasonably low floor, and you're set. – Joe Dec 7 '16 at 22:00

If you are like most people, your timing is kind of awful. What I mean by most, is all. Psychologically we have strong tendencies to buy when the market is high and avoid buying when it is low. One of the easiest to implement strategies to avoid this is Dollar Cost Averaging. In most cases you are far better off making small investments regularly.

Having said that, you may need to "save" a bit in order to make subsequent investments because of minimums.

For me there is also a positive psychological effect of putting money to work sooner and more often. I find it enjoyable to purchase shares of a mutual fund or stock and the days that I do so are a bit better than the others.

An added benefit to doing regular investing is to have them be automated. Many wealthy people describe this as a key to success as they can focused on the business of earning money in their chosen profession as opposed to investing money they have already earned. Additionally the author of I will Teach You to be Rich cites this as a easy, free, and key step in building wealth.

  • Interesting. Even if the trade fee is $18? That would be $36 a month then if I invest as much as I contribute (twice a month). – Paul Erdos Dec 7 '16 at 21:49
  • Yea, not so much then. I left out that caveat. I would probably invest no more than 4 times per year and probably do 3 with that kind of fee. Is there any way you can have that fee reduced? – Pete B. Dec 8 '16 at 12:40
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    The question that should be asked is - why would you invest in a Roth IRA with a $18 trade fee? You have options like investing in index funds through Vanguard with no upfront fee and very few long term fees. Its unlikely that most people will be wise enough with transactions that the $18 per transaction fee, even if paid only 6 times yearly, would make it worth it. Expenses on that are $18*6/5500 = 1.9%. Its a bad idea to pay 2% in transaction fees like that. – CrimsonX Dec 8 '16 at 15:33
  • I agree @CrimsonX. I tend to prefer Fidelity where if you call and ask they will give you free trades, or you can buy iShares or their house funds for free. However, I am sure Vanguard has similar offerings. Both have no annual fee for housing your retirement. – Pete B. Dec 8 '16 at 15:42
  • Thanks for the advice, everyone! I'm probably going to look into moving my assets to Vanguard or Fidelity. – Paul Erdos Dec 8 '16 at 17:28

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