This Is the Best Time of Year To Fund Your IRA, According to Experts

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Regardless of whether you’re investing in a traditional or Roth individual retirement account, an IRA is a great, tax-advantaged way to save for retirement. But when is the best time of year to fund your IRA?

According to experts at Vanguard, the earlier you contribute to your IRA, the better. Meaning, the earlier in the year you contribute, the more time the money has to compound and grow — tax-free for a Roth, and tax-deferred for a traditional. If you invest a lump sum in January instead of April, for example, that gives the money an additional three months to grow each year. Over the course of your life, that can add up to a substantial amount.

Consider this example:

If you contribute the maximum of $7,000 each year to a Roth starting at age 35 and assume a 7% rate of return, you’ll end up with approximately $707,000 at age 65. If you start contributing just one year later, at age 36, you’ll end up with approximately $654,000 — a difference of 53,000. 

This example shows that when you contribute makes a big difference in the final amount you’ll have at retirement. So losing gains for January through November each year if you contribute at the end of the year — or worse, losing the entire year’s worth plus some if you wait until the Tax Day deadline the following April — can greatly impact the amount you’ll earn.

One way to contribute consistently and take advantage of compound gains is to divide the investments into monthly contributions and schedule them to be deposited automatically from your bank account. To max out an IRA (or split your max contributions between IRAs), you would invest $584 each month. 

This has the added benefit of dollar-cost averaging, as it spreads out your contributions over the year and allows you to invest more when the markets are down and less when prices are high.

The bottom line is that making contributions to your IRA at any time is better than not contributing at all. If you have the funds to invest at the beginning of the year, that will give you the advantage of being in the market longer. But investing monthly and having it set on auto-pay every month allows you to contribute consistently and not have to worry about saving the money throughout the year.

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