Contributing to an individual retirement account (IRA) each year is one of the best ways to save for retirement.

You can make contributions to your IRA around the first day of the new year and at any point throughout the year before the following tax yet, however it’s worth knowing the sooner you invest, the more time your money has to compound and grow.

Ultimately, the decision should be based on your own financial health and journey. Regardless of the timing you choose, it’s always important to remember that saving for retirement is always a step in the right direction. However, it is important for investors to be aware of the factors that determine the best time to make contributions to your IRA.

What is an IRA and how does it work?

An IRA is a tax-advantaged retirement account that individuals can contribute to as a way of saving for retirement. There are typically two IRA options for people to choose from:

  • Traditional IRA: Contributions to a traditional IRA are made with pre-tax dollars, which means you could get a tax break on your contributions. Your contributions can then be invested and grow tax-free until you start making withdrawals during retirement.
  • Roth IRA: In a Roth IRA, contributions are made with after-tax dollars, so there is no immediate tax benefit. However, your withdrawals during retirement are completely tax free making Roth IRAs a major tool in retirement savings.

Contributions for traditional and Roth IRAs are limited to $7,000 in 2024, or $8,000 if you’re age 50 or older.

When is the best time to fund your IRA?

When to contribute to an IRA, or whether to contribute to one at all, will depend on the circumstances of the individual making the contribution. You may want to prioritize other areas of your financial life, such as paying off any high-interest debt or building an emergency fund before contributing to an IRA. However, this doesn’t mean you should neglect an IRA completely.

Once you get your financial house in order, it may be time to contribute to your IRA. Here’s what to know about timing your contributions.

Early contributions have more time to compound

You can contribute to your IRA at any time during the year, and studies show that contributions made earlier in the year have more time to compound. The timing of your contribution may seem like a small decision, but the impact can really add up over time.

Someone who made a single contribution each January for 30 years would end up with nearly $18,000 more than someone who made the same contribution in April, according to a Vanguard study based on a $6,000 contribution limit and 4 percent annual returns. Each person contributes the same amount over 30 years, but the earlier contributions result in a higher ending balance due to the effects of compounding.

Of course, not everyone can afford to fully fund their IRA with a single contribution in January, but making contributions as soon as you’re able should help boost your savings over time. You might also consider making consistent contributions over time, which is a technique known as dollar-cost averaging.

Income considerations may force a delay

One reason to consider delaying IRA contributions is if you aren’t sure what your income is going to be for the year. Your income can impact whether or not your contribution to a traditional IRA is eligible for a tax deduction. Contributions to a Roth IRA aren’t allowed at all beyond certain income thresholds, although you can pursue a backdoor Roth IRA.

In 2024, the maximum income level where you can still make a full Roth IRA contribution is $146,000 for individuals and heads of household, and $230,000 for married couples filing jointly.

Bottom line

How and when to contribute to an IRA will ultimately depend on the specific circumstances of the individual making the contribution. If you aren’t sure how best to proceed, consider working with a financial advisor to determine your best course of action.

Contributions made earlier in the year have more time to compound than ones made at the deadline, but you may need to have clarity on your annual income in order to determine whether your contributions are eligible for a tax break or if you can contribute to a Roth IRA at all.