Your IRA: contribute all at once or little by little?
If you contribute to a Roth IRA you have to decide whether to deposit all the money at once into the account or do it multiple times ta year. Frugal Dad debates which makes sense when the stock market is going haywire.
"A lot of people thought that the best option was to fund the whole $5,000 right away. The reason? There were a few, but mainly it was to give their money as much time to compound as possible and to just get it all done right away and not have to think about it the rest of the year.
"Well, the markets are WAY off their January numbers and it's one of those rare times I get to look back at something I wrote earlier in the year and go, "I was right." I just hope karma doesn't come back to bite me in the butt.
"If you put the whole $5,000 in your Roth back in January and invested in index funds (like the S&P 500), you'd have around $4,100 right now, that's a loss of around 18%. But the worst part about it is that you can't buy any stocks right now even though they're "cheaper"! You've reached your limit and lost all flexibility. There is nothing you can do.
"On the other hand...
... if you put $1,000 into the market in January, then in April, and then in July, you'd have around $2,641 left, a drop of only 12%. And you'd have the flexibility to put more money ($2,000) in at these lower prices, which would reduce your losses if the market keeps going down."
Either way you take a loss, but contributing in multiples protects you a bit more. And in the long run a few hundred dollars means thousands of dollars to retire on. Plus there is greater gain if/when the market goes back up.
Contributing once a year is easier administratively, but I bet you can set up your bank account so it automatically sends the money on a quarterly or monthly basis to your Roth IRA. A phone call now could translate into $$$ in the future.
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About The Bargain Hunter
Daily News staff writer Julia Scott loves to find bargains on everything from groceries to Gucci. Her tips will help keep your hard earned cash where it belongs - in your pocket.
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Depending on how your IRA is set up, there may be a big difference between the action of contributing to the IRA and the action of investing those funds.
If, for example, the entire IRA is invested in a single mutual fund, then contributing and investing are done in the same action.
However, if you have an account at a brokerage firm such as Schwab, ShareBuilder, etc, then when the contribution is made it is held in cash in the account. The contribution is the part that has the annual limitations on it. Then, you can choose to invest it in one lump sum or at several different times, or even wait a few years and then invest it. There are very few limitations to how the investments are made in an IRA.