Editors' pick: Originally published March 31.
Some investors are loath to fund their IRA until the last minute, waiting until shortly before the April 15 deadline, a practice that can affect the returns on their retirement portfolios.
Although a large number of investors follow this strategy, waiting until April to make the contribution yields lower returns long-term, said Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pa.
Investors should fund their IRAs each month, because stocks and bonds generate positive returns on average, he said.
“The longer you are invested, the longer you are earning those average returns,” Johnson said. “There are market periods providing negative returns. Over the long haul, having your money invested rather than not invested is a good strategy.”
Cons of Waiting Until April
Some investors are waiting until the last minute to fund their IRA, because they plan to use the money from their tax return, commission or bonus check, said Brian Neal, financial advisor at Hefty Wealth Partners in Auburn, Ind. The majority of investors benefit from “a more disciplined approach by investing periodically instead of relying on the end of the year to invest,” he said.
Making periodic investments remains a better strategy because dollar-cost averaging gives people to opportunity to purchase mutual funds and ETFs when they are cheaper.
“Investing weekly or monthly gives investors the opportunity to purchase at low points of the market,” Neal said. “Individuals may forget, so waiting until the last minute to do anything, especially investing for retirement may not be a good idea.”
Any volatility in the market is mitigated by having your funds invested for the long term.
“Most of us who are investing in an IRA or Roth IRA aren’t planning to use the money for a while, so the short-term swings in the market may have less of an impact,” said Lisa LaMarche, a partner at Milestone Wealth Advisors in Greenville, Del.
Waiting until April to invest in an IRA is “akin to timing the market, but the deck is stacked against you,” Johnson said.
“It matters because the longer you are invested, the higher your returns are over the long haul,” he said.
Funding a contribution on January 1 every year means the funding has 15.5 months to "work for the investor" compared to people who wait until April 15, said Gordon Bernhardt, CEO of Bernhardt Wealth Management in McLean, Va. If two people contribute $5,500 to their IRA for 40 years and earn 8% annually on their account, the one who funds it in January will earn $1,661,000 in the IRA or Roth IRA and the investor who waits until April will have accumulated $1,505,000, he said.
The next "best thing" is to allocate $458.33 every month into an IRA fund so that at the end of the calendar year the $5,500 contribution has been made, Bernhardt said. "Some of those monthly contributions will have a longer period of time to compound, but all $5,500 will be invested a full 3.5 months before the investor who makes his contribution on April 15 of every year for the previous year," he said.
Why People Wait
Some individuals wait until April to make their IRA contribution, because they also funded their 401(k) and do not know if their modified adjusted gross income makes them eligible to contribute or deduct the contribution until they prepare their return, said Scott Mazuzan, a financial advisor at F.L. Putnam Investment Management Co. in Portland, Maine. Depending on the amount of your salary and contribution into a 401(k) plan, contributing into an IRA may only result in a partial deduction for your taxes.
“Some individuals or married couples filing jointly may be able to offset their anticipated tax bill by making an additional last minute contribution to an IRA,” he said.
Investors can contribute a total of $5,500 into an IRA and Roth IRA for both 2015 and 2016, according to the IRS.
Many individuals are “reluctant to hand over $5,500 in one fell swoop especially after the financially harrowing holiday months,” said Mazuzan. Sticking to a more disciplined approach of making consistent, even small, automatic contributions to an IRA helps individuals obtain the same tax and saving objectives while spreading out the "pain" over the course of the calendar year, he said.
“Whether you decide to make a lump sum contribution or regular contributions to an IRA throughout the year, we always emphasize the importance of good record keeping,” said Mazuzan. “A tax professional can help you correctly attribute an IRA contribution to the appropriate tax year and guide you on all future contribution decisions.”
Procrastinators who chose to make a lump sum payment in April can decide if the funds should be invested in a traditional IRA versus a Roth IRA contribution, said Benjamin Sullivan, a portfolio manager with Palisades Hudson Financial Group in its Austin, Texas, branch office. Roth IRA contributions can not be deducted, because the distributions you receive in retirement are tax free.
“For those struggling to save for retirement, waiting until the deadline also gives them more time to accumulate the funds to make the contribution,” he said.
Waiting to receive your tax return to fund an IRA is not the best strategy, but many investors rely on the income to fund their retirement.
“I find most investors do fund their IRAs or Roth IRA around tax time,” LaMarche said. “If a person isn’t working with a financial advisor, they may not even think about it until their accountant asks if they are funding an IRA this year. One benefit of waiting until April is that filing your taxes is a reminder to get it done.”