Roth IRA Monthly Contributions vs. Lump Sum

by Jacquelyn Jeanty, studioD

As far as individual retirement accounts go, Roth IRAs offer certain tax breaks that other types of investment vehicles don’t. Contributions to Roth IRAs can occur on a monthly, quarterly or semiannual basis as well as in lump-sum amounts. Whether to contribute on a periodic basis versus a lump-sum amount depends on a person’s financial situation, though market conditions may warrant choosing one method over another.

Roth IRAs

Roth IRAs exist as a modified version of traditional IRA accounts. Contributions made to Roth IRA accounts come in the form of after-tax dollars, whereas traditional IRAs can come from before-tax or after-tax dollars. The use of after-tax dollars to fund Roth IRAs allows contribution amounts to earn interest on a tax-free basis. Any monies deposited into a Roth IRA must come from income earnings or alimony payments made. When opening a Roth IRA account, account holders must decide whether to contribute on a monthly basis, in one lump sum amount or a combination of the two. The Internal Revenue Service sets limits on the total amount of contributions made to a Roth IRA account, according to the Tax Guide for Investors online site. As of publication, a $5,000 limit exists for people under 50 years old. People older than 50 have a $6,000 contribution limit.

Monthly Contributions

Because Roth IRAs have limitations on the amount a person can invest, account holders can reap the most benefit in terms of earnings by maximizing their account limits. Monthly contributions, such as those that occur through employee paycheck deductions, provide a convenient and affordable means of maximizing account limits. In effect, account holders make small contributions throughout the year into a Roth IRA account. While more affordable, in some cases account holders may have to pay more in fee charges due to the multiple transactions made on the account. Fee charges vary depending on the terms of the contract and the charges put in place by the insurance company.

Lump-Sum Contributions

Lump-sum contribution amounts can potentially offer the highest return on investment with a Roth IRA, because larger amounts earn more interest than smaller amounts. People who can afford to make a one-time lump sum contribution may want to ensure that they don’t exceed the contributions limit placed on Roth IRA’s. Any amounts exceeding the $5,000 or $6,000 limit become subject to a 6-percent penalty tax. Since any funds deposited in an IRA must come from income earned or alimony income, excess amounts can result when contribution amounts exceed a person’s annual earned income. Since Roth IRA accounts earn interest based on the type of investment products backing the account, the risk for large losses (or potential for large gains) increases in cases where the market experiences unexpected ups or downs.

Monthly and Lump-Sum Contributions

The annual contribution limits placed on Roth IRAs follow tax-year guidelines as opposed to the January-to-December calendar year terms. Combining monthly and lump sum contribution amounts comes in handy in cases where someone opens up a Roth IRA account after the start of a tax year. A person can set up monthly contribution amounts for the remainder of the year and then make a lump sum contribution toward the end of the year. In this way, a person can still maximize his account limit even after getting a late start in the year.

About the Author

Jacquelyn Jeanty has worked as a freelance writer since 2008. Her work appears at various websites. Her specialty areas include health, home and garden, Christianity and personal development. Jeanty holds a Bachelor of Arts in psychology from Purdue University.

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