1/6/2014 4:45 PM ET|
Max out your IRA now, not next April
Waiting until the last minute to contribute to your IRA means missing out on up to 16 months of potential tax-deferred gains -- which can really add up over the years.
It's a new year. And that means it's time for investors to do what they could have done last year -- but didn't.
Namely: make contributions to their 2013 individual retirement accounts.
Indeed, an analysis of traditional and Roth IRA contributions made by Vanguard Group customers for the 2007 through 2012 tax years showed that, on average, 41 percent of the dollars contributed to IRAs for any given tax year are invested between January and April of the following year. Half of those dollars are contributed in the first half of April -- the final weeks that contributions for the previous year can be made.
The study found only 10 percent of dollars are contributed in January of the corresponding tax year, the earliest month contributions can be made. "We are trying to encourage people to change their way of thinking and think about it sooner," says Maria Bruno, a senior investment analyst with Vanguard Investment Strategy Group.
There are legitimate reasons that big dollars flow into IRAs near the tax-filing deadline. At that point, taxpayers typically know whether their income for the prior year was low enough to qualify for deductible contributions, and can see by exactly how much a contribution would lower their tax bill.
But some advisers say the habit is one of the ultimate examples of investor laziness, nearly on par with not maxing out the company match for 401k contributions or not seeking retirement advice until after retirement.
"As humans we naturally procrastinate," says Mackey McNeill, an accountant and financial adviser in Bellevue, Ky.
Procrastination can be costly. The problem, advisers and retirement consultants say, is that investors who make IRA contributions at the last moment miss out on 16 months of potential gains (from January of one year until April of the following year), as well as the chance for those gains to compound over many years.
Even if two investors contribute the same amount of money over the years, the person who starts earlier could end up with significantly more savings down the line.
Compare a saver who makes the maximum annual IRA contribution of $5,500 for those under age 50 in January of each year with another saver who contributes the same amount each April 15 of the following year. Over 31 years, assuming the money is invested in a moderate portfolio earning a hypothetical 7 percent annual return, the saver who makes full contributions in January could end up with $83,000 in additional savings after 30 years, even though both investors contributed equal amounts -- about $170,500 -- overall, according to an analysis by McNeill.
Another downside to putting off contributions: It could add to your tax bills. Money in a taxable account over that 16-month period may incur gains that would have been deferred in an IRA, says Ed Slott, an accountant and founder of IRAHelp.com, a website for retirement savers.
Some pros say investors' excuses for not contributing as early as possible are looking thin. Most people don't see their income swing wildly from one year to the next, Bruno says. They can likely use last year's tax return to decide whether to make a contribution for the current tax year each January.
Procrastinators still have time to change their ways. Some can catch up if they now make their 2013 and 2014 contributions -- a total of $11,000 for those under 50 contributing the maximum for each year, McNeill says. Those investors can then get in the habit of making their IRA contributions at the start of each year. (Investors 50 or older can contribute as much as $6,500 to their IRAs each year.)
While a doubled-up contribution is a lot to set aside at once, she says: "You've only got to make this change for one year."
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This article is makes it sounds much worse than it is. The only way you loose out on $83,000 is if you have $5500 a the beginning of the year that could be invested in an IRA, but instead you blow it on a vacation or something and never save it for retirement. The second section about the tax burden starts with "Another downside", which makes it sounds like the effects are cumulative. But if you have that money in a similar investment outside the IRA, then this tax burden is the only downside.
Yes, there is some advantage to putting the money in early, but it's not as bad as they make it sound.
"Who can afford to contribute to an IRA with the ever rising cost of health insurance and education, the wage decline, the housing bust? A paycheck can only stretch so far."
Who pays less than $1,500 a month now in total fees and premiums? Insurance-related services are killing America. Time to eliminate the financial sector and rebuild based on commonsense, not commissions.
IRA broke American!!!
Two counterpoints -- the first is that if I am a retirement saver and faithfully invest the max in my IRA to qualify for the tax write-off starting at age 22 (or as soon as I am required to file) but I do it in April of the following year, what I have really left on the table is the accrued 45 year earnings I could have had from that first IRA investment that I waited 16 months to make at age 22. Everything else is equal once it goes into the IRA. Becuase most retirment savers don't start investing the max the moment they are required to file a return, they are leaving a lot more on the table long before timing questions even come into play.
The second counterpoint is that there is some potential timing benefit to possibly waiting until the end of the filing cycle to put in your IRA contribution. If the market drops significantly over that cycle, or say, between January and April, my overall IRA account will take an inevitable hit, but with the current year contribution I can purchase more IRA shares in February and possibly March or April than I could have in January, and with luck avoid an unfortunate downswing. They tell you not to try to time the market, but with an IRA investment one of the few things you can control is the timing of your annual input. Might as well use it.
Unless your 401k contribution is maxed out an IRA just adds another advisor fee to you retirement savings. And if you can afford to do this you are probably above the threshold anyway.
If one is self employed and doesn't have a 401k then the individuals income will fluctuate yearly which is why they wait until they have that years taxes ready to contribute.
As a tax preparer we had one individual go from EIC refund to $20,000 owed in 2 years.
I wish I could max it out. I wish I could have maxed it out every year I have owned it. It's not possible for the average Joe to do that with financial responsibilities like paying heat, lights and groceries. With the downsizing of consumer products by the likes of companies such as Proctor and Gamble(they wrote the book on downsizing stuff), Johnson and Johnson, Scot Paper Company and others who then charge more or the same for a lesser amount, what's a guy to do? A 64 oz container of ice cream is now 48 ounces, a pound of coffee is now 11-12 ounces.......and it all costs the same or more. A 1000 sheets of toilet paper may still be a 1000 sheets but the measurement of the sheet is down by 10-12 %. All the big guys, including the government want to play us as fools. Don't worry......be happy! I will be happy when they legalize marijuana. It's the least they can do for an honest Joe who wants no problems.
kind of hard to do when your wadges for the entire year are less than 20,000 by the time you take all tax and other (%((^&%*(%^ out you have about 5,000 left to live on and my job is a common every day job i drive local dump truck delivering rock products to the rich or the wantabe rich that never fail to tell you are nothing but with out us common joes they would have nothing but they do all they can to keep us down it will only be a little time and all will come crashing down around their ears and they will becomming to us for help
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