Why Should I Make Early IRA Contributions?

Please Share!
Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on email
Email

Early IRA contributions can benefit your financial situation.

We are solidly into the year 2020.

Time is a fast flowing river.

In fact, we are fewer than two months away from the tax filing deadline.

You are looking at your finances and realize you can still contribute to your IRA for 2020.

You have always waited to contribute until the last minute.

According to a recent Vanguard article titled “IRA contributions: The earlier, the better,” early IRA contributions can set you up for more success.

Early IRA contributions can increase your retirement savings.
Compound interest benefits from early IRA contributions.

How so?

Investing early in your IRA can help you maximize the growth of your investments.

Three factors are central to investment growth.

What are they?

Investment performance.

You have no control over this factor.

All investments involve risk.

The market will oscillate and these will impact the earnings.

The amount you invest.

If there is more money in your account and the investments grow by a certain percentage, then more money will be generated than if you had less money in the account.

Makes sense so far, yes?

This is where compounded interest enters the picture.

The money you put in grew.

The new money now in your account from the growth can also grow by a certain percentage in the future.

In short, money generated through investments can generate more money making early IRA contributions more appealing.

There are limits as to how much you can contribute in a given year, but no limits regarding how much this money can grow.

Your investment timing.

This is where the concept of early IRA contributions is important.

You can contribute to an IRA account from January of the current year—say 2020 in this example—to April 15 of the following year.

While you can wait until April 2021 to make your contributions, you are missing 15 months of compounding interest.

Yikes!

Here is some math to illustrate the point.

In situation A, you make an early IRA contribution in January of $5,500 each year for 30 years.

With a 4 percent return, you will have a final balance of $323,967 with your contributions included.

In situation B, you delay your annually $5,500 contribution until the following April for 30 years.

With a 4 recent return, you will have a final balance of $308,467 with you contributions included.

This is a difference of $15,500 less than you would have made through early IRA contributions.

Although you may not be able to invest the same amount every year, you should make it a goal to save between 12 percent and 15 percent of your gross income each year.

What if you do not have the financial ability to make lump contributions in January?

Set up monthly automatic transfers.

You will likely never miss the money and will adjust your budget accordingly.

Little financial adjustments now can make a big difference later.

Reference: Vanguard (Jan. 21, 2020) “IRA contributions: The earlier, the better”