The following are the rules for Version 2 of the Annual vs. Monthly IRA Contribution Timing Experiment. These rules are meant to be the guidelines upon which the experiment is run.
The experiment begins on January 1, 2014 and will continue as part of a lasting effort to discover how investment timing affects performance over time.
Annual vs. Monthly IRA Contribution Timing Experiment Rules
- Simulated Roth IRA accounts will be used for both accounts.
- The accounts are assumed to have no annual fees, no transaction fees, no commissions, or trading costs.
- No interest is earned on any cash balance between the time of deposit and the time of trade execution.
- No selling will take place during the entirety of this experiment. Both accounts will adhere to the “buy and hold” mentality.
- The Annual Contribution IRA will contribute the yearly maximum, per IRS guidelines, on January 1st of each year.
- During the first year of the experiment, the Monthly Contribution IRA will contribute $1,000 on January 1st. Contributions occurring during the subsequent months of the first year will be of an equal monthly amount equivalent to the remainder of the contribution maximum. Rounding may occur for simplicity.
- After the first year, the Monthly Contribution IRA will contribute an equal monthly amount on the 1st of each month. The amount will be based on the annual maximum, per IRS guidelines, divided by 12 months. The first 11 months of contributions during the year may be rounded down for simplicity. The December contribution may include up to an extra dollar of contributions to make up for the rounding.
- The Annual Contribution IRA will invest the entire contribution by purchasing the fund of choice on the first trading day of the year.
- The Monthly Contribution IRA will invest the periodic contribution by purchasing the fund of choice on the first trading day of each month.
- The fund of choice for this experiment will be the Vanguard Target Retirement 2045 Fund (VTIVX).
- The investment minimum for this fund is $1,000.
- All forms of income from dividends and capital gains will be reinvested.
- Because of the nature of this fund, there are no asset allocation concerns or any need to periodically re-balance.
- An update will be posted on the blog each month to report the changes and summarize the activities that occur in each account.
- For simplicity, the numbers in the tables will be rounded and formatted to only two decimal places.