IRA Contribution: Why Timing Matters

October 28, 2022

Topics:

Media type: Article, Podcast

IRA Contribution: Why Timing Matters

2.9 minute read • 

October 28, 2022

Until 2023, if you’re under age 50, you can contribute up to $6,500 to one or more IRA accounts. If you are 50 or older, the limit is slightly higher ($7,500). *

You can contribute to a year-specific IRA any time between January 1 and the next year’s tax deadline (usually April 15). So you have until April 18, 2023 to contribute to your 2022 IRA, but we don’t recommend waiting. You can also make 2023 IRA contributions between January 1, 2023 and April 15, 2024.

Learn how to invest in an IRA now

Investment Points

You invest to make money. The money you earn depends mainly on three factors:

asset allocation. Bonds, stocks, and short-term cash reserves are all types of assets. When you invest, you can choose the percentage of your total portfolio that you want to allocate to each type of asset. Depending on where you are in your investment journey, you can choose a more aggressive allocation (like a higher percentage of stocks) or a less risky allocation (like a higher percentage of bonds).

The amount you invest. You earn money through compound interest – when the income from your investments generates its own income. If you contribute more, you have more money to generate income…which means you have more income to generate additional income. As long as you stay within your annual IRA contribution limits, you can control how much you invest. Learn more about IRA eligibility, contribution limits, and withdrawal rules.

when you invest. If you wait until the tax deadline to contribute to an IRA, you will miss more than 15 months of compound interest. If you have the financial flexibility to choose when to contribute to an IRA, do so as soon as possible. Understand the relationship between time, risk and reward.

Time is money

Using the 2022 contribution limit, assuming you invest $6,000 per year in your IRA for 30 years, your average annual return is 4%. **

Example 1:

You make a one-time investment each January and your ending balance is $354,053, which includes a gain of $174,053.

Example two:

You make a one-time investment each April and your ending balance is $336,510, which includes earnings of $156,510. This is $17,543 less than what you won in Example A. In each example, you contribute a total of $180,000 to the IRA over a 30-year period. The difference in income is only due at the time of your donation.

do your best

The hypothetical examples above represent hypothetical scenarios that are not always repeatable in real life. For example, you may not be able to invest the same amount every year or you may have to skip years altogether. It does not matter. Take small steps to save 12-15% of your gross income (including employer contributions) each year.

Maybe you don’t have the financial flexibility to make a lump sum contribution to your IRA in January or April or any other month. Right. Try setting up recurring automatic bank transfers. By making two monthly contributions over a 30-year period (total contributions of $180,000) and earning an average annual return of 4%, the ending balance is lower than Example A but higher than Example A. B not bad.

Want to improve your retirement goals? Use our retirement income calculator to see where you are now and how much you might need in the future.

If you contribute to an IRA, regardless of how much and when, you’re on the right track. But if you happen to find that you can afford to make your annual IRA contribution before next year’s tax filing deadline, go for it!