CTC Tips: fund your IRA at the beginning of the year

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Waiting until the end of the year to contribute to your IRA limits your potential for growth.

A Money.com article reported that 70% of IRA contributions in 2013 were made near the contribution deadline. Waiting until then can cost an investor over $15,000 over 30 years: “assuming an investor contributes the maximum $5,500 annually for 30 years ($6,500 for those over age 50), and earns 4% after inflation, procrastinators will wind up with account balances $15,500 lower than someone who contributes as early as possible in a tax year.”

Year-end contributions miss out on months of growth. As such, putting $2,000 dollars into your IRA on January 1st is not the same as putting that same amount of money into your IRA on December 31st. If you contributed $2,000 into your IRA annually and receive a 5% return, here’s an example of how the timing of your contributions would affect growth:*

Years Invested Jan. 1st Contribution Dec. 31st Contribution Difference
5 $11,604.00 $11,051.00 $553.00
10 $26,414.00 $25,156.00 $1,258.00
15 $45,315.00 $43,157.00 $2,158.00
20 $69,439.00 $66,132.00 $3,307.00
25 $100,227.00 $95,454.00 $4,773.00
30 $139,522.00 $132,878.00 $6,644.00
35 $189,673.00 $180,641.00 $9,032.00
40 $253,680.00 $241,600.00 $12,080.00

As the Money.com article points out, people can have various reasons to wait until the end of the year to contribute to their IRA: some don’t have the money available to invest earlier in the year while others wait until they receive year-end bonuses. But whatever the reason may be, waiting can hurt their return.

Of course, contributing at the end of the year is better than not contributing at all. So regardless of when you’re contributing, you’re doing a great thing for your future. But if you are able, contribute early in the year — or regularly throughout the year —  instead of waiting until the end of the year to make the most of your investments.

Source: This Simple Move Can Boost Your Savings by Thousands of Dollars — Money.com

*Table taken from Kettley Concepts for Professionals (Kettley, 1999)

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