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.