Delaying Roth IRA Contributions One Year Could Cost You $74,000

Last year was the first year I have been able to make the maximum contribution to my Roth IRA, thanks in large part to becoming debt free. I was also able to fund a spousal IRA for my wife, who stays home with our kids.

Now that it is 2010 I am psyched to make even more contributions to our Roth, but wondered if I should wait until the end of the tax year, make monthly contributions, or try to plunk down all the money up front. Turns out this is a costly decision.

Putting aside thoughts on market timing, and market predictions for 2010, it seemed like socking away the maximum contribution early in the year was the way to go. Of course, this meant trying to come up with $5,000 after already depleting some savings to fund last year’s Roth.

Just as I was feeling nervous about moving another $5,000 from my cash reserves, I was reminded of my own advice:  max out because Roth IRA withdrawal rules allow for withdrawal of contributions at any time without penalty. That’s right! Assuming I had not lost my entire investment in the Roth account, I could simply withdraw a portion of the $5,000 contribution later in the year in an emergency.

The Impact of Delaying Roth IRA Contributions One Year

So what’s the advantage of tying up my savings so early in the year? Using the financial calculators at, I ran a couple calculations with the following assumptions:

Let’s assume I turn 30 years-old On January 1, 2010, and according to the 2010 Roth IRA income limits I can invest the full $5,000 in a Roth IRA earning an 8% return. I continue to invest $5,000 on my birthday (January 1st) for the next 35 years. My original $175,000 in Roth IRA contributions would grow to $930,511.

If I delayed that first contribution until my 31st birthday, I’d only have $856,584. This is essentially the same result you’d get by waiting to contribute until the end of the year. And while it is nothing to sneeze at, you would lose about $74,000 in compounding growth by waiting a year to get started.

This certainly underscores the important of starting early. It also reinforces my plan to encourage our kids to open Roth IRAs as teenagers when they begin earning an income – even if we have to help them fund the account up to their income. Imagine what the numbers would look like if you started saving at 17 years old!

If you are concerned about earning too much money, contribute now and adjust later. It is possible to avoid penalties if you take corrective action by the due date for making Roth IRA contributions for that particular tax year (typically April 15th or the day you file your return, whichever occurs earlier, but not counting extensions, etc.).

I Have No Savings – Should I Borrow To Make Roth Contributions?

After being in debt for so long, I am very reluctant to borrow again. However, borrowing $5,000 at a very low interest rate (or even free if you can catch a zero-percent balance transfer) might make sense considering the amount of compounding growth you give up over an investing lifetime. Personally, I would not borrow the money, and look for another way to fund the contribution – a side hustle, selling something valuable, but not sentimental, etc.

Whatever you decide to do, do it quickly, as hundreds of dollars are sliding by for every day you put off funding a Roth IRA.


  1. I wonder how many people realize that you can contribute another 5,000 if you are married and have a stay-at-home wife and have enough earned income. So even if your wife doesn’t have an official “out of the home” earned income job, it’s still possible to contribute 5,000 in her a Roth account in her name.

    Thanks for flushing out the details! I bet a lot of people don’t realize this excellent exception to the Roth earned income test.

  2. I’m SO grateful that my parents (and my husband’s parents, ironically) set up Roth IRAs when we were 16 and had our first jobs. I never contributed more than $100 at a time, and our parents never added contributions… but it was so nice to start working with a small retirement account. It’s much easier to add to an existing account than start from $0. We hope to retire at 50 or 55, thanks to this head start.

  3. Roth IRAs are great for many reasons. My favorite is that the earnings are tax free. If you believe you’ll be in a higher income tax bracket upon retiring it’s a no-brainer to choose it over other tax deferred plans like Traditional IRAs or 401K. That said, I would never borrow to invest, even if the interest rate is zero %. Debt cleanup is much too important to me, and now that I’ve been debt free except the house for over a year I will never go back. To me it’s the “slippery slope” of borrowing. Rationalizing debt has gotten more people in over their heads than it has made wealthy. People I know personally (names withheld) use “0% interest, no payments for x-number months” as their mantra for the past 15 years I’ve known them. Guess where they are today? Mid-50s, deeply in debt, and just refinanced their house to consolidate debts accumulated from a lifetime of overspending. At this rate, if they add NO MORE DEBT (unlikely), they will not have their house paid off until they are in their mid-80s, if they live that long. No Sir, debt-free feels great. As you say, FD, find a side hustle or sell stuff, or cut your lifestyle back. $5000 a year is about $100 per week. A part-time job would fulfill that AND keep you out of debt.

  4. Wow, I do not know how I overlooked the fact that you can withdraw the contributions without penalty. My wife and I have been debating what to do with some bonus money coming our way, and were leaning towards solely putting it in the emergency fund, but now I may put a fair chunk of it in the Roth.

    That makes me feel much more comfortable – thanks so much!

  5. I’m so glad you posted this. I’ve known that I should invest in a Roth IRA but I hadn’t really researched it. It makes sense for me to put a little less into savings and some into a Roth IRA instead. I’m 23 years old so I can’t even imagine how big of a difference that will make.

  6. I’m interested to know what “funds” you put your Roth IRA into. Yes compounding interest works, but I personally have not seen much appreciation in such accounts (as with any investments these past few years). Would be great if you can share some of those tips!

  7. FD,
    The Roth IRA is definitely a great place to put money. The options for investmetn are unlimited and the returns are tax free.
    I, however, would borrow to invest… and in fact, most people already do. For instnace, anyone who has investments (stocks or otherwise)and aklso has a mortgage on their home IS borrowing to invest. If you were not “borrowing” to invest, every last penny would go to pay down the mortgage before you invested in any other investment.
    There’s not anything wrong with that at all. I do it myself. But, people must realize that when they are investing in stocks when they still have a mortgage, they actually are “borrowing” to invest.
    It’s akin to having a margin account. But, ask the average person if they would ever invest on margin and most likely they’d say “no way”. Food for thought.
    Thanks for the great article!

  8. Agree and disagree. I agree, because most of the time you are probably correct. I disagree, because if you had made your contribution on 1/1/08 versus 12/31/08, you would have lost a significant portion of your money during that year. Granted that’s market timing; however, it is something to consider.

  9. @FrugalNYC: I’m hesitant to share the exact funds I’ve invest in because the last thing I want is people investing their money in something just because I do! Assuming we all do our own research, and tilt risk to match our own situations, I’ll tell you that my Roth funds are with Vanguard in target retirement funds. I lean towards the more conservative target funds there (based on my age) rather than stretching way out to something like a 2045 fund which is almost 90% invested in stocks.

    Target funds are good, but they aren’t really a one-stop solution. For instance, the target fund I invest in through the Roth IRA has very little international exposure, so I tweaked my 401k account to allocate more towards international investments. A good reminder to take a holistic approach to diversifying your overall retirement portfolio.

  10. Interesting idea, and the numbers really help it to stand out. Personally I contribute throughout the year, although rarely equal numbers. My theory is that whenever I have the money is the right time to put it in, so long as I do max it out each year.

  11. Congrats on getting out of debt so you can max out your Roth IRA’s. This (getting out of debt) is key to generating cash flow for investing. You didn’t say what kind of debt you had, but, just for point of illustration, investing while in credit card debt is the same as borrowing money on your credit card to invest with.

    Most people would never do that.

  12. I have invested in a Roth IRA since the Roth first became available and have always maxed out. The Roth is so flexible: I can withdraw principal any time, withdraw funds tax-free in retirement when taxes will definitely higher than today, or leave the money tax-free to my daughter and even grandchildren. What’s not to like? (Oh, and I do invest the full $5000 at the beginning of the year; more time for the money to grow.)

  13. OK.

    So, isn’t this the same as delaying taking out(cashing out) your Roth IRA when you are 71 instead of 70 or 81 instead of 80. You get my point?

    Every year you delay taking the money out means you make more or does it mean you lost out on it?

  14. All this number work is great, but can’t help but point out that a dip like that of ’09 would essentially put you in the negative, or at least drop most of the gains you pointed out. Like what many “201k” investor’s are now facing.

    What are your thoughts on that? Would be very interested to hear.

  15. @FrugalNYC: Keep in mind the growth I was referring to was the result of 35 years of compounding, which will include many years of ups and downs (but hopefully more ups).

    As you get closer to retirement and begin to roll into more conservative investments market volatility should affect you less and less. Far too many people within a year or two of retirement had a significant portion of their investments in stocks, and lost their shirts in the beginning of the Great Recession.

  16. That’s a lot of money for just one year. Every dollar at a young age really matters as it’s magnified of time.

    If you would start at 20 instead of 30 and invest 5k a year in the roth til age 65 you’d also have made over $1.1 million more than the example used above. That’s a lot of money to give up by not investing young!

  17. I completely agree with trying to invest the full $5000 early in the year, starting at the earliest age possible.

    This past summer I had my first true income as an intern. I earned a bit over $5000 in my first full-time work experience and invested the max to a Roth IRA right at the conclusion of my internship (because I’m still in college and luckily don’t have too many expenses to deal with). I’m really glad I made my first contribution before turning 20–hopefully I can reap the benefits later on!

  18. Great idea, absolutely. However, if I am on the the ‘edge’ of max. income limits, then, is it not better to wait till I file taxes to know how much exactly I can contribute to avoid “penalties of over contributing”? This is also helpful as $100 per month or so may not be enough to ‘start’ a ROTH for Van Guard and alikes.

  19. This is why I just started and maxed my first year so I wouldn’t miss out. I don’t have 401k and needed to get starting being in mid 20’s. Going to struggle to max out year 2 but will try hard to.

  20. Thanks for the post! It caused me to email my 19 year old sister just to ask her to look into her options.

    My husband and I (26 and 27 respectively) have been investing in my 401k and his pension plan since we got our jobs in 2005 and 2006. We bought our home in 2007 with 20% down and will pay if off by 2016. We’ve also been fully funding a Roth IRA since 2007 and he went back to graduate school. This year we hope to fully fund another Roth IRA since the graduate school money will be available to invest. We also take one large budgeted vacation a year (about $2000-$2500) and a few weekend trips ($250-$400).

    All of this has been done with the combined salaries of an office worker and a teacher in Houston, Texas…about $78,000 a year before taxes or $62,000 after.

    It really is possible to save and invest in your future whether you make 6 figures or not…you just have to make sure to spend only on what makes you happy and cut back everywhere else.

    In our case, we choose to spend on cable and internet ($100 a month), board games ($200 a year), Netflix ($18 a month), a maid ($45 every two weeks), and yard service ($25 every two weeks 8 months a year). We also spend too much on fast food and restaurants, but we are trying to cut back this year.

    We don’t drink much, we don’t smoke, I don’t buy lots of expensive clothing, and we don’t splurge too often. It helps that I love reading and we have a great library system close by. I would also suggest purchasing vehicles in such intervals as to only have one car loan at a time or buy with cash if you can (we couldn’t, but my car is paid off and his is just a couple of years away).

    Most importantly (it has saved us a few times), make sure to have a solid emergency fund before you think of anything else. You never know what can happen.

    Good luck to anyone looking to get on track! Thanks again for the post!

  21. I just started investing into a Roth IRA last month, and one day after my money was posted I had already lost money. Should I be scared? (I understand there will be ups and down, but wow a loss after one day) I am investing through USAA in a moderately agressive plan and have about 25 more years to go before I can retire. Any suggestions? Should I get in a little less aggresive fund?

  22. Okay…I admit I am a (very) late bloomer (47 yrs. old) when it comes to investing but am crazy enough to believe that with a stealthy vigilant but wise and agressive investment plan I can make up for lost time as I am beginning to see a little light at the end of the debt tunnel. Is it realistic to believe that financial security can still be acheived at this stage of life with all the investment options available, especially with the growth being generated in key industries like solar energy, technology, utilities, oil with respect to whats happening here at home AND in overseas economies like China, India??

  23. Most people say it’s best to dollar cost. Putting in little at a time each month. Say you put all 5,000 in at once and the market drops 10% now you can’t make any more.

    Where if you put $500 a month and the market drops more then 2 or 3% you can double-up that month to $1,000 over time this will make you even more money!!!

  24. I also agree that one should not borrow to invest. Nothing good can come of it. It is said that one should not invest “scared money.” Scared money is when you would be scared if you lost it. Please be patient for all of life’s wants. If you are in a position of having money work for you, please check out my first blog ever. It is It is a finance blog with a serious focus on Elliott Wave Principle and other unbiased technical analysis. I made the blog to help everyone in the world discover the secrets of the the stock market. Please let me know what you think. Thank you so much.

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