retirement

Fund an IRA early to grow a bigger account

Retirement » Fund An IRA Early To Grow A Bigger Account

If you wait until April 15 each year to make a prior-year contribution to your IRA, the size of your future nest egg could take a hit.

Indeed, while most investors are well aware that saving early in their career can significantly increase their retirement savings in the future, few appreciate the importance of funding an IRA early in the calendar year as well.

You have until April 15, 2014 to fund your IRA for the 2013 tax year. At the same time, you can wait until April 15 of next year to fund your IRA for the 2014 tax year. Or you don't have to procrastinate at all.

If you fund your 2014 IRA early this year rather than delaying until the tax filing deadline on April 15, 2015, you're giving your savings the chance to benefit from additional months of tax-deferred, compounded growth. That's tax-free growth if you fund a Roth IRA.

The advantage of funding an IRA early

What difference does it make to fund an IRA early? Your retirement account could be six figures greater by the time you retire, says Ed Slott, an IRA expert with IRAhelp.com and author of "The Retirement Savings Time Bomb and How to Diffuse It."

We are all conditioned to contribute to our IRAs in April for the prior year because that's the way it's always been done, but there's no question that funding your IRA on the first day of the calendar year -- more than a year ahead of the deadline -- makes a big difference, he says. It's just math. Any gains are now sheltered from taxes for an extra 15 months.

Assuming an 8 percent annual rate of return, a 25-year-old investor who contributes $5,500 a year to her IRA at the beginning of each year would have $113,985 more in earnings after 40 years than her peers who wait until the following spring to contribute.

There's another benefit to making IRA contributions as early in the calendar year as possible, says Greg Hammond, president of Hammond Iles Wealth Advisors in Wethersfield, Conn. Such timing better positions your portfolio to capture market gains.

Historically, he notes, the stock market performs best during the six-month stretch from November to April.

Between 1950 and December 2013, in fact, the Dow Jones industrial average gained 16,398 points during those months, while losing 1,066 points during the remaining May-through-October months, according to the Stock Trader's Almanac. The Standard & Poor's 500 index likewise gained 1,663 points during those years between November and April, while gaining just 75.5 points between May-through-October.

If you're waiting until April of the following year to invest, your contributions are going in toward the end of what is typically the best months of the year in the market, says Hammond.

How to fund an IRA early

It does take some financial sacrifice to adjust your contribution schedule going forward, however.

That first year, Slott says, you'll need to double up -- making a prior year contribution to your IRA by April while separately funding your current-year IRA.

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