Remember that you are able to make an IRA contribution for a given year anytime between January 1 and the tax-filing deadline of the following year (usually April 15). That means that you can make a 2020 IRA contribution between Jan’ 1, 2020, and April 15, 2021. However, do not wait. Why not?

Vanguard’s recent article entitled “IRA contributions: The earlier, the better” notes that you invest to earn money, and the amount of money you earn depends primarily on three factors—two you can control.

1. Investment performance. There is no way to control investment performance and all investing involves risk. The main cause of risk is market movement, which impacts your investment earnings.
2. The amount you invest. You earn your money with compounding, when your investment earnings make their own earnings. If you contribute more, you have more money to generate earnings. That means you have more earnings to generate additional earnings. You can control the amount you invest, provided you keep within the annual IRA contribution limit.
3. Your investment timing. If you wait until April to make an IRA contribution, you have missed 15 months of compounding, so if you have the financial flexibility to decide when you contribute to your IRA, do it ASAP.

As an illustration, let us imagine that you invest $5,500 in your IRA each year for 30 years, and your average annual return is 4%. In Situation A, you make a lump-sum investment every January, and your end balance is $323,967. That includes $158,967 in earnings. In Situation B, you make a lump-sum investment every April and your end balance is $308,467. That includes $143,467 in earnings, which is $15,500 less than you would earn in the first scenario. In each situation, you are contributing a total of $165,000 to your IRA over the span of 30 years.

This illustration shows some what-if scenarios that are not always possible to do in real life. For instance, you may not be able to invest the same amount each year or have to skip a few years. However, you should make small steps toward saving 12%–15% of your gross income (including employer contributions) every year. If you do not have the financial flexibility to make a lump-sum investment in your IRA—in January or April (or in any other month as a matter of fact), try to set up recurring automatic bank transfers. If you make bi-weekly contributions over the course of 30 years (for a total contribution of $165,000) and earn a 4% average annual return, the end balance is smaller than Situation A but larger than Situation B.

However, remember that you can’t contribute more than you’ve earned for the year.

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

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys