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IRA Management

The Benefits of an Early IRA Contribution

Want to know a simple strategy that can help you end up with thousands more to spend in retirement?

Articles by Fred Egler, CFP®

By Fred Egler, CFP®
Financial Planner, Betterment
Published: January 28, 2019 | Updated: April 23, 2019

Invest at the beginning of the year rather than at the deadline to spend more time in the market.

More time in the market can potentially mean higher returns.

If you’re under 50, the 2019 IRA contribution limit is $6,000. If you’re over 50, the limit is $7,000.

Time and time again, Betterment and many other financial advisors highlight the overwhelming evidence that market timing doesn’t work. But there’s one exception—contributing to your IRA as early as possible.

This timing strategy is so powerful, that any investor who hypothetically could have contributed to their IRA at the beginning of every year would have left an average of $8,800 on the table over a ten-year period (see Figure 1 for the evidence).

How it Works: “Timing” Your IRA Contributions

For 2018, an investor younger than 50 can contribute a maximum of $5,500 to an IRA, and in 2019, that maximum has gone up to $6,000. It’s your choice to either make a maximum contribution early in the year, contribute over time, or wait until the deadline. By timing your contribution to be as early as possible, you can maximize your time in market, which could help you gain more returns over time.

If you save up and max out your IRA at the beginning of the year, it gives each contribution an extra year to grow. If the market trends upwards over time, as it has done in the past, you can expect greater growth by spending more time in the market.

Let’s Run the Numbers

To test how well this strategy could have worked throughout a ten-year period, let’s compare it to the default strategy for most people—waiting until the end of the year to max out their IRA. For those younger than 50, the current IRA contribution limit for 2019 is $6,000. This example will be completely hypothetical, assuming an annual rate of return of 10% to illustrate what performance for IRA contributions could have been like (see Figure 1 below for more information as to how we got this number).

Scenario 1: Max Out Late

First, imagine making the annual $6,000 investment at the end of the calendar year—every year for 10 years, as will be described below.

Scenario 2: Max Out Early

For comparison, let’s do the same thing but make each annual investment in January of that same year, which is almost a whole year earlier—the first possible day to contribute for that tax year. Again, for each simulation, we’ll measure the portfolio value on the same day as in the first scenario.

In this hypothetical example, investing as early as possible (Scenario 2) would have resulted in an $8,800 higher account balance after ten years, on average. Considering we’ve invested $60,000 total in both scenarios, the $8,800 amounts to an additional 14% return on the invested principal, as compared to the late deposit strategy (Scenario 1).

Below, you can see this benefit of giving each of your contributions an extra year in the market. Any extra growth can then compound over the entire lifetime of each annual contribution.


Figure 1. This figure represents the scenarios mentioned above.‘Deposit Early’ indicates depositing $6,000 on January 1 of each calendar year, whereas ‘Deposit Late’ indicates depositing $6,000 on December 1 of the same calendar year, both every year for a ten-year period. The calculations assume a hypothetical growth rate of 10% annually. The hypothetical growth rate is not based on, and should not be interpreted to reflect, any Betterment portfolio, or any other investment or portfolio, and is purely an arbitrary number. Further, the results are solely based on the calculations mentioned in the preceding sentences. These figures do not take into account any dividend reinvestment, taxes, market changes, or any fees charged. The illustration does not reflect the chance for loss or gain, and actual returns can vary from those above.

Ready to “time” your IRA contribution for 2019?

Ready to experience the benefits of maxing out your IRA early? Get started or log in to open and fund an IRA for the 2019 tax year. You can even still contribute to the 2018 tax year up until April 12th. Click here for a reminder on IRA rules and limits, which have changed in 2019.

Please note that Betterment is not a tax advisor—please consult a tax professional for further guidance.

Contributing Authors

Dan Egan
Managing Director of Behavioral Finance & Investing, Betterment

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