The best time to invest in an Roth individual retirement account (Roth IRA) is when you can maximize your tax advantages. The sooner you can make contributions to an IRA, the better to allow more time for your investments to grow tax-free.
For each person, the exact best time to invest in a Roth IRA will depend on several factors about your financial situation, including your cash flow and financial goals.
Key Takeaways
- The amount of tax that you pay on Roth contributions depends on how much you earn.
- Investing when you are younger helps you leverage the benefit of compound interest.
- Using annual allowances as early as possible gives your money more time to grow in value.
- Spreading out payments allows you to take advantage of dollar-cost averaging.
How Timing Roth IRA Contributions Works
Investing in a Roth IRA can help you financially prepare for your financial future with significant tax advantages. Unlike their traditional IRAs, Roth IRAs are funded with after-tax dollars, meaning that you pay the Internal Revenue Service (IRS) upfront rather than when withdrawing funds later.
With a Roth, your compounding earnings grow tax-free, which can make a significant difference in how much you can save for retirement. They also let you lock in your current tax rate, as opposed to being charged a potentially higher one that you could encounter later in life as you amass more income and wealth.
Naturally, there are other pros and cons to consider before making a decision on whether to invest in a Roth. Perhaps the most important factor is timing. Timing your contributions correctly allows you to fully maximize your contribution limits and therefore maximize the tax benefits of a Roth IRA.
When Is the Best Time to Invest in a Roth IRA?
The best time to invest in an Roth IRA is as soon as you can afford to make the payments without disrupting your budget.
If you are considering when to contribution to a Roth IRA versus a traditional IRA, consider your current and potential future tax brackets. Consider consulting a financial professional advisor to help you weigh the pros and cons of investing in a Roth IRA now versus converting a traditional IRA to a Roth in the future.
Note
No matter your retirement account type, you will typically benefit from investing as much as you can to the maximum contribution limits sooner rather than later.
The Sooner, the Better
The amount of tax that you pay on Roth contributions depends on how much you earn. So it’s wise to invest in one when you are making less money and in a lower tax bracket. For this reason, consider investing in a Roth IRA as a younger professional because your salary and tax rate will usually increase. What’s more, when you earn over a certain amount, you are no longer allowed to invest in a Roth.
Another advantage of investing in a Roth IRA earlier in life is that you will have more time to benefit from compounding, which is when your earnings are reinvested to result in even greater earnings in a snowball-like effect.
Compounding can accelerate the growth of your savings significantly. With a Roth, all of these earnings are effectively tax-free.
Convert When Income Dips
There is an annual limit to how much you can contribute to a Roth IRA. In 2024, it's $7,000. However, there are no limits when converting money to a Roth from a traditional IRA or some other retirement account, such as a 401(k).
If you’re thinking about doing a conversion, getting the timing right could save you thousands of dollars. Ideally, the best time to do this is when you experience a dip in income.
When you lose a job and are struggling financially, the last thing you’ll probably be thinking about is retirement. However, it can pay to do so. These periods can be a good time for taking stock of your finances and assessing any benefits for which you may be eligible.
The current tax rates, introduced with the Tax Cuts and Jobs Act (TCJA)of 2017, are set to expire in 2025—meaning that they will revert to higher rates—unless Congress extends them.
When Is It Best to Make Annual Roth IRA Contributions?
There is a limit each year to how much you can contribute to your Roth IRA. The time frame to hit this quota isn’t the calendar year, but rather up until the tax deadline—usually April 15—of the following year, barring any one-off exceptions.
Is there a best time to make contributions to a Roth IRA? That depends on your personal circ*mstances and cash flow.
Lump-Sum Contributions
If you have the maximum contribution amount at the beginning of the year that you don’t need to pay bills, consider putting it in your Roth IRA immediately. The logic here is that the sooner you contribute your money, the sooner it will start growing tax-free.
Waiting until the deadline can lead you to miss out on around a year’s worth of potential growth.
One reason some people wait until just before the deadline is that by then they know their total income and marginal tax bracket.
Regular Contributions
Spreading out contributions is sometimes the better way to add funds to a Roth IRA, especially if it fits your budget.
One benefit is that by investing each month, rather than in one lump sum, you are protecting yourself against price volatility. This could be particularly favorable if the price of the asset declines from the time when you would have made a lump-sum investment.
Frequently Asked Questions (FAQs)
What Is the Downside of a Roth Individual Retirement Account (Roth IRA)?
Like any financial product, Roth individual retirement accounts (Roth IRAs) have downsides to consider. Drawbacks include contributions being nondeductible, early withdrawal penalties on earnings, income eligibility restrictions, and limited investment choice.
How Much Should I Put in My Roth IRA Monthly?
In 2024, you can contribution up to a maximum of $7,000, which is $583.33 per month. Maxing out contributions can help you reach your retirement goals sooner.
What Is the 5-year Rule for Roth IRAs?
The five-year rule mainly concerns the withdrawal of funds. In the case of a Roth, you can always withdraw contributions with no penalty at any age. However, to withdraw earnings without penalties, at least five years must have passed since you first contributed to the account, and you also must be at least 59½ years old.
The Bottom Line
Think carefully about how to time your Roth IRA contributions so you get the maximum benefit. Generally, the sooner you can make your contributions, the better. Aim to contribute up to the maximum amount to get more tax advantages.
