A Roth IRA offers more flexibility, although the contribution is not deductible over time, and you could bring in thousands more dollars by accruing it tax-free. If you invest the money in the Roth IRA, future earnings aren’t taxed as long as the money stays in the account, and if you make a qualified Roth IRA distribution, they’re never taxed. If you already have a larger established IRA, I’d invest it all in the first month of the year. The more you contribute each year and the longer your time frame, the more money you’re likely to accumulate in your IRA.
The biggest downside to distributing your contribution over the year is that you’re delaying the use of the tax-protected growth of Roth IRAs. When you earn your Roth IRA, you can be done for the whole year — you don’t have to worry about pouring the money into it every month or being tempted to spend the money somewhere else. If you make the lump sum contribution at the beginning of the year, it could also be that you are short of money later in the year and have to make a payout. If you have the money available to invest everything at once without affecting your cash flow or emergency fund, it’s a good way to maximize your contributions and be done with it.
Another option is to set up monthly contributions equal to the amount you can afford and then try to make contributions for that tax year before the tax filing deadline. It also gives you the option to reassess your income situation if you’re concerned about whether you can contribute to a Roth IRA due to income restrictions. However, the vast majority of people are unable to do so, which is why they invest money on a monthly basis. If you invest the money in an interest-bearing IRA instead, the same interest is deferred for tax purposes.
On the other hand, those who support equal monthly contributions to an IRA suggest that you’ll be better off as you won’t have to try to time the market and you’ll benefit from averaging dollar costs. The third way to maximize your IRA contributions is to combine the two methods listed above (value averaging is another common method). If you have the money for the contribution in an interest-bearing account, this interest is considered taxable income.
