You're Probably Funding Your Roth IRA The Wrong Way (And It's An Easy Fix)

There are lots of potential benefits that come with converting an IRA to a Roth IRA, or simply opening a new Roth IRA outright. However, determining which assets you want to invest in is only one of several important considerations: Deciding exactly how you should go about funding your retirement savings accounts to receive the biggest growth potential and benefits can be just as integral to building wealth. In the case of a Roth IRA, you can either contribute one lump-sum payment to the account or make smaller contributions throughout the year.

Studies indicate that dollar-cost averaging (DCA), the practice of funding a Roth IRA through small contributions spread throughout the year, could be a mistake. Instead, investing the entire amount you're allowed to contribute as quickly as possible might be preferable for many savers. A study from Northwestern Mutual showed that, when investing the same amount of money in the same mixture of investments over a 10-year period, lump sums outperformed the DCA option almost 75% of the time. When only fixed-income investments were part of the portfolio, lump-sum techniques did better 90% of the time.

Before worrying about making contributions the right or wrong way, the first step is opening the Roth IRA and starting to save for retirement as early as possible. If you had invested $1,000 in the S&P 500 10 years ago, that money may have more than tripled by now. Pairing lump-sum investing and starting early could give you the best chance at success when investing in a Roth IRA.

Lump-sum investing involves contributing the maximum amount you're allowed to add to your account all at once. Unless they're on the higher end of the earning spectrum, the IRS allows people under 50 to contribute a maximum of $7,500 and those over 50 to invest up to $8,600. For the 2026 tax year, you could've made your Roth IRA contribution as early as January 1, 2026. The last date you can contribute for 2026 is the date your federal income tax is due for the year, which would be April 15, 2027. By investing in January instead of the following year's April, your lump sum investment can work for you for an extra 15 months. Because the S&P 500 has experienced positive annual returns 75% of the time in the past 20 years, you have a higher chance of seeing stock investment growth by being invested for a longer amount of time.

When using DCA, you might divide your maximum IRA contribution by 12 and invest it in equal increments each month throughout the year. By the end of the year, you'd have invested the same amount with either technique. However, your lump-sum contribution would have allowed more of your money to have been invested longer, which the Northwestern Mutual study found is usually beneficial. A similar study from Vanguard backed up those findings, showing lump-sum investing had better results 68% of the time.

To use the lump-sum technique, you'll first need to open a Roth IRA. Remember: Unlike with a 401(k), where an employer deducts money from your paycheck and deposits it into the account for you, opening and contributing to a Roth IRA falls on you. Once you have your account set up, figure out how much you can invest based on your age and income bracket. Then, make the full contribution amount to your account as soon after January 1 as you can. If your financial situation changes during the year and your lump sum contribution ends up being too high, you can usually request a withdrawal correction before the income tax filing deadline to fix the issue.

Some people might wonder whether investmenting when the stock market is at an all-time high is a good idea. While making a lump-sum contribution and investment instead of using DCA does make people more susceptible to potential market downturns, you receive the advantage of compounding interest and potential gains. Of course, positive returns are never guaranteed, but opting to make lump-sum contributions could at least put the odds in your favor if you have the means.