Should you max out your IRA early in 2022? Here’s what advisors say

If you’re eager to save more, you may consider maxing out 2022 individual retirement account contributions early rather than waiting until the tax-filing deadline in 2023.

But there are mixed opinions about lump-sum investing versus spreading out deposits at set intervals, known as dollar-cost averaging.

The IRA contribution limits for 2022 are the lesser of $6,000 or your taxable compensation for the year, with an extra $1,000 for investors age 50 and older. 

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“I say go ahead and put it in,” said Sallie Mullins Thompson, a Washington-based certified financial planner and certified public accountant at the firm with her name. “Otherwise, they might spend it on something else.”

Moreover, investing the money now offers more time for compounded returns, Mullins Thompson said, and there’s faster tax-free growth if you’re contributing to a Roth IRA.

“You want to do that as soon as possible,” she said.

Lump-sum investing may beat dollar-cost averaging as the stock market trends higher, according to a study from Northwestern Mutual Wealth Management.

The study looked at rolling, 10-year returns of $1 million invested immediately starting in 1950, which outperformed funds allocated over time.

However, some experts prefer dollar-cost averaging to lessen downside risk, particularly for disciplined savers.

By [investing] on a monthly basis, you are buying when the markets are high or low, so you’re getting a better average price over the year.

Jay Spector

Partner at Barton Spector Wealth Strategies

“You want to be able to take lots of bites at the apple,” said Jay Spector, a CFP and partner at Barton Spector Wealth Strategies in Scottsdale, Arizona, explaining how many investors opt for IRA deposits throughout the year. 

“By [investing] on a monthly basis, you are buying when the markets are high or low, so you’re getting a better average price over the year.”

For example, if you had contributed $6,000 or $7,000 in February 2020, the value may have dropped 20% or 30% in March 2020 at the start of the pandemic, he said. 

However, if you’d split the money between February, March and April 2020, you may have had a “better overall average experience” getting into the market, Spector explained. 

Of course, investing now or incrementally may both pay off when it comes to planning for long-term goals.

“We’re talking about people saving money for their future,” he said. “So really, there is no wrong answer.” 

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