How to Max Out Your Roth IRA Contributions

by Ryan Guina

Roth IRAs are one of my favorite investment vehicles because they offer great tax benefits, especially now that the IRS removed the income limitations for Roth IRA conversions, making Roth IRAs more easily accessible to virtually everyone. That said, there are some limits to how much of a good thing you can have and the IRS imposes strict limits for Roth IRA contributions. In addition to the contribution limits, IRAs are a use it or lose it proposition – you only have one opportunity to make the contribution, and once it is gone, it is gone. This article will show you how you can take advantage of the tax benefits IRAs offer and maximize your contributions. Need to learn more about Roth IRA Withdrawal rules, we can help you with that too!

How to Max Out Your Roth IRA Contributions

We are going to work with the assumption that you already have an IRA. If you don’t, then here is an article that discusses where to open an IRA. In addition, I frequently reference Roth IRAs because I believe them to be the superior option for most people, however, these tips work or both Traditional and Roth IRAs.

Once your IRA is open you need to fund it. You can do this one of several ways: contribute a lump sum for the entire year, set up a monthly allotment to maximize your contributions on a monthly basis, or a combination of these. Let’s a look at a couple examples and the pros and cons of each.

Maximizing IRA Contributions with a Lump Sum

People under age 50 can contribute up to $5,500 per year in an IRA, or up to $11,000 per couple (people age 50 and over can contribute $1,000 more). If you have the money available to invest all at once without affecting your cash flow or emergency fund, then this is a good way to max out your contributions and be done with it.

  • Pros: Studies show the lump sum investing at the beginning of the year almost always out performs market timing or investing via dollar cost averaging, or making regular contributions throughout the year. The markets tend to go up over the long run, so the longer you have your money in the market, the longer it has to grow in value.
  • Cons: There are some downsides to investing all at once – the first is you could invest everything right before a market crash or adjustment and lost a lot of money (dollar cost averaging would spread your contributions and minimize your upside and downside). The other risk is contributing too much if you are near the Roth IRA or Traditional IRA income limits. Did you contribute too much? Here is what to do about excess Roth IRA contributions.

Maximizing IRA Investments with Dollar Cost Averaging

Dollar Cost Averaging (DCA) is a method of investing where you make contributions on a periodic basis (usually monthly, or with your paycheck) to the same investment. This is a common way to invest in employer sponsored retirement plans such as a 401k, but also works for individual investments. There are pros and cons to this approach.

  • Pros: Dollar Cost Averaging is easy, more affordable for the average investor, and it removes guesswork and market timing from the equation. Setting up automatic monthly payments ensures you always make the investment, and the monthly investments make it easier to maximize your contributions (it is easier for most people to contribute a few hundred dollars each month vs. making an annual lump sum contribution of several thousand dollars). DCA removes market timing from the equation: since you buy the same investment each period, you buy more shares when the value is low and fewer shares when the value is high.
  • Cons: There are a couple things to look out for with dollar cost averaging – because you are making more transactions, you may be subjecting yourself to more fees. This isn’t likely the case when making 401k contributions because there normally aren’t transaction fees, but it may be the case if you are investing through a brokerage or buying individual shares of stocks on a regular basis.

How to maximize your IRA contributions with Dollar Cost Averaging. To set your investment contributions on auto-pilot, simply divide your maximum contribution by the number of months (or paychecks). For example, if you want to max out your IRA with 12 monthly contributions, then you would set up automatic investments for $458.33 per month for a single investor ($5,500 max annual contribution) or $916.66 per month for a married couple ($11,000 max contribution). If you are age 50 or over, then divide $6,500 by 12 for $541.67 per month.

Combination of Lump Sum and Dollar Cost Averaging

The third way to max out your IRA contributions is to do a combination of the two methods listed above (Value Averaging is another common method). There are a couple ways this can benefit you.

For example, say you want to maximize you IRA contributions, but it’s May and you haven’t started yet. You can contribute a lump sum of $1,833.32 to make up for the first 4 months of the year, then set up a monthly contribution of $458.33 per month for the remainder of the year. This will ensure you are able to maximize your annual Roth IRA contributions this year. The bonus is you will also have automatic contributions set up for maximizing your Roth IRA contributions next year.

Another way to do it is to set up monthly contributions for the amount you can afford on a monthly basis, then try to make contributions for that tax year before the tax filing deadline. The IRS allows IRA contributions until that tax year’s filing deadline, giving you a few extra months to max out your IRA contributions. For example, if you set up a monthly investment plan of $300 per month at the beginning of the year you would contribute $3,600 by Dec. 31st. You could still contribute the additional $1,900 to max out your IRA by the tax deadline of April 15th.

The benefit of going this route is that it allows you to contribute what you can afford, and still have time to make up for the full contributions if you are able to do so at a later date. It also gives you the ability to reassess your income situation if you are concerned about your ability to make contributions to a Roth IRA based on income limitations.


Published or updated August 31, 2016.
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{ 18 comments… read them below or add one }

1 Becky@FamilyandFinances

My husband and I are almost done funding our ROTH’s for last year and are already at work on our ROTH’s for this tax year. We have the same thought: save/invest as much as possible now before we go down to one income and start our family!

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2 Lily

Dollar-cost averaging isn’t bunk simply because the market goes up in the long run so lump-sum investing gives you more time to compound. DCA is also bunk if the market goes up in the short run, since you’ll be buying shares at progressively higher prices.

Anyway, my IRA is fully funded for this year. 🙂

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3 Ryan

Lily, in your example, if the market goes down in the short run, you’ll be buying shares at progressively lower prices. It works both ways.

But I still think lump sum investing is better overall. However, DCA is good for things like investing in a 401(k), if you don’t have a lot of money to invest on a regular basis, or if you just want to automate investing because it is easier or you don’t have the discipline to save and invest. But if there is a choice between the two, lump sum investing is usually better.

Thanks for the comment, and congrats on funding your Roth IRA for year!

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4 Ed Carrero

The DCA vs. Lump sum argument is a good one: neither side is “better.” Especially since so few people have $5,000 to throw in right away. DCA allows me to pay more attention to my account, which is a personal thing.

But I agree that maxing out the Roth is a great feeling, there’s nothing quite like it.

As for ideas or tips, I’m not sure how involved you want to be in the investment process, but will you be considering Lifecycle funds?

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5 kentuckyliz

Re: lump sum vs. dollar cost averaging. The research shows that the best time to invest is as soon as you have the money. (You can’t predict which handful of days per year result in the market gains. So, be in it to win it!)

So the question is, do I have the lump sum on hand? Yes?–then go all in. No? Then contribute on a regular basis through payroll deduction or automatic contributions. Ta da! Dollar cost averaging is the result. A lot of us end up doing this because of retirement plan contributions at work–the payroll deduction solution.

I’m really interested in ETF’s and still learning. (Ric Edelman has a lot to say on the subject.) There is a transaction fee with each purchase of ETF shares, so I’m thinking when I start down this road, of converting some existing accounts all in one swoop (lump sum end of things), and then with the ongoing monthly contributions, to allocate that to money market initially (with bimonthly automatic contributions) then pinging it over into the ETFs quarterly…(DCA end of things)…to contain the transaction costs.

Not quite ready to pounce personally, but tiptoeing up to it and preparing.

Good on ya for maxing the Roths. I’m delighted with my young decision to do this, with previous windfalls and opportunities…early money is like yeast, it makes the dough rise. That is money that didn’t slip through my fingers! w00t

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6 No Debt Plan

Roth is definitely the way to go. And go ahead and dump it all in versus dollar cost averaging. The markets have taken a beating — and could take a further one, no doubt — but get the money in there and consider it done.

I don’t remember seeing this, but I’m guessing you have maxed out your Roth IRA’s for last year? Obviously you would want to do that before you max out your IRA this year since you have more time to meet the contribution deadline.

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7 Ryan

kentuckyliz, I’m still learning about ETFs as well. I like what I have seen, so now it comes down to finding our target allocation and determining which index funds or ETFs match our goals. Since we have a lump sum to invest right now, ETFs would be perfect. Your plan is well thought out and should work. Good luck!

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8 Ryan

No Debt Plan, Yes, we maxed out our Roth IRAs for the year… Thanks for double checking! I agree about the current markets. With them being down overall, now is a good time to jump in. I just need to figure out where I need to place my money!

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9 Amanda @ Me vs Debt

I just opened my first Roth last month. Its kind of scary when the market is down. I know I shouldn’t look, but I can’t help it! Have you experienced that yet?

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10 Ryan

Buying when the market is down is often the best time to buy! Don’t worry about it. IRAs are for your retirement, so you have a long time for your investment to grow. The important thing is that you have your money in there!

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11 kentuckyliz

Volality is not the same as risk. If you are investing for the long term, then short-term volality really shouldn’t worry you one iota. The question is, what do you think will happen to the market by the time you intend to use this money?

I’m 42 and I’m eligible to retire at 52 but don’t want to really…so if I retire at 62 or 67, that’s 20 to 25 years from now! And, I’m only going to use some of the money in 20-25 years; if I live to age 97, some of my time horizon is as high as 55 years!

So what is going to happen to the markets over the next 20 to 55 years?

General market performance: in 97% of the roling 5 year periods, the market is up. In 100% of the rolling 10 year periods, the market is up. So I guess when I’m within five years of my planned retirement age, I’ll move the first year’s distribution into something safer. LOL

It is a rollercoaster going uphill. You feel the ups and downs in the short run, but over the long run you’re going uphill.

Time eliminates volatility as a risk. So never save short-term monies (within 5 years) in equities–too risky. But any financial goals longer than 5 years out, it’s too risky to NOT be in equities–because of the other risk that will eat your lunch–INFLATION.

As a young investor, the first up and down markets are really wonderful and scary. But once you’ve been through it once, you can be a placid cow of an investor and never act out of fear or greed, never follow the crowd, never time the market, but just keep sticking with it and stay in it to win it.

The 90s market runup was damned exhilirating…wow, that was fun to feel I was getting rich moment by moment. The worst bear market since the great depression happened right after that. I didn’t even look at my statements. Effective investor behavior is to BUY BUY BUY in the down markets! Don’t stop contributing, keep at it. Never pull your money out of your investments in a down market out of panic–you’re locking in your losses. You haven’t really lost money if you leave it alone, ready to get the gains again when the market recovers.

You CANNOT PREDICT which handful of days per year result in the market gains for that year. To pull your money out means you have to make another good decision about when to put it back in…if you wait until the news tells you the market has recovered, it’s too late, you missed the moment. You have to know before everyone else does.

Market timing doesn’t work. NONE of the market timing gurus/newsletters beat the market at all, much less other placid cow investors who just stay all in. Crystal balls don’t work.

Terrific book: Nick Murray, Simple Wealth, Inevitable Wealth. It will help you comprehend what you need to know to be an effective investor by controlling your own emotions and behavior and not sabotaging yourself. How to become that happy, placid cow. Short and sweet and non-technical plain English and a great pep talk for the tough times.

Good luck everyone!!!!

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12 Pat S

Decide what you can put in monthly, and stick to the plan increasing the amount every time you get a raise. You’ll max out your Roth soon, while dollar cost averaging into the position.

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13 Gaurav

Great article Ryan. Many thanks.
My question is what will happen if I cross the eligible salary criteria. I will be filing as married filed jointly but once my wife starts earning we will be crossing that mark. Please advise.

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14 Ryan Guina

Gaurav, once you pass the eligible income range, you can contribute to a Traditional IRA, and possibly convert that to a Roth IRA. Keep in mind there may be tax consequences of converting a Traditional IRA to a Roth IRA, particularly if you already have a Traditional IRA. However, it may be worth it in the long run, depending on your situation. This is something you may wish to speak to a tax professional about. You can also try to reduce your adjusted gross income (AGI) by contributing more money to a 401k plan or other retirement plan.

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15 JimW

Hi Ryan –

Nice article.. Perhaps you can offer some guidance. My wife and I are both covered by 401K’s at work. We are over 50. We each contribute the max for 2014 ($23,500). We file jointly and are over the income limits for IRA deductibility. We are over the income limit for Roth IRA contribution as well.

My question…. I think we can legally contribute $6500 to an IRA. Is there an advantage to this over an after tax mutual fund investment? Meaning, why would I invest in and IRA if I cannot take the contribution off my income?

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16 Ryan Guina

Great question, Jim. There are still advantages to investing in a non-deductible IRA. The big one is that you are sheltering your investments from immediate taxes. For example, if you earn dividends on your investments in a non-retirement account, you will pay taxes on that income each year. If those same dividends are earned in a retirement account, they are tax-exempt (at least until you being withdrawals, and then, you only pay taxes on the amount you withdraw).

There are some more advanced things you can do as well, including contributing to a Traditional IRA, then rolling over into a Roth IRA. This is easier to do if your IRA was non-deductible. But there may be tax consequences if you already have an IRA. So this is an area where it is a good idea to speak to a tax professional so you understand the full ramifications of doing a Roth IRA rollover.

Here is an article that discusses benefits of investing in a non-deductible IRA. I hope this helps!

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17 margit collamore

I contribute to a 401K and a roth IRA at work (biweekly paycheck). Can I contribute up to $6500 for both accounts per year (age 52)? or $6500 per year combined?

V/r, Mrs. Collamore

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18 Ryan Guina

Hello Margit, you can contribute up to $6,500 into your Roth IRA in 2016, provided you meet the contribution income levels. But the 401k has a separate contribution limit of $18,000 (under age 50). Those ages 50 and over can contribute and additional $6,000 per year. So the maximum you could contribute is $6,500 into your IRA, and up to $24,000 into your 401k.

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