When to Contribute to an IRA

Do you contribute to an IRA on an annual basis?  When in the year do you contribute?  Are you one to make your contribution early in January or do you wait until closer to the tax and contribution deadline?  Depending on your timing over the long haul the delay could cost you some serious money later on down the road.  As an IRA contributor you may make your contributions anywhere from the first of January until April 15th of the following year.

By waiting to make your contributions later in the year you are taking valuable time away from the tax advantaged status and the power of compounding interest and gains.  Also people tend to make poorer investment decisions closer to tax time as there is a sense of urgency in their contributions.  But by making the contribution earlier in the year you will gain valuable time for the asset to appreciate in value.  This will also help the account outpace inflation by adding the extra time to compound its value.

And we are talking some serious compounding.  Let’s look at some numbers and time frames.  If you were to contribute $5,500 to an IRA every year for 30 years, your working years and prior to retirement, what would the difference be between making the contribution at the start or end of the year assuming a 7% return.  For the early saver they would have $597,769 and the late saver would have $561,402 for a difference of almost $36,000.  That could be an extra year in retirement depending on your situation.  Not a bad tradeoff for making a contribution that you planned on making anyway, just earlier.

Also when you make a contribution at the last minute you may not be making a wise selection on your investment.  In many instances the funds people put in their IRA is placed in low yielding assets such as a money market account.  Those who invest early in the year have more time to make wise decisions and can invest with the knowledge that they have performed their due diligence and are investing in the asset that is best suited for them.

One way to fund your IRA at the start of the year is an easy one.  If you are getting a tax refund and file your taxes early put the refund to work for yourself by investing it in your IRA.  Between savings and the refund I hope you can get close to the maximum $5,500 annual contribution limit for those under the age of 50 and $6,500 for those who are older than 50 and allowed a catch-up contribution.  Maximize your contributions regardless of anything else and try to make them as early in the year as you can to maximize your potential gains.

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