With tax day just around the corner, you still have time to fund an individual retirement account for tax year 2023.
Retirement savers who want to invest in an IRA have a window of roughly 15 1/2 months to make their contributions, which can be done all at once or over time.
So if you’re considering a late-in-the-game retirement contribution, don’t wait any longer. Delaying your contribution results in what’s known as a procrastination penalty.
[Read: 10 Tax Breaks for People Over 50.]
Procrastinators Miss Out on Growth
If you plan on contributing to an IRA, you can contribute any time from Jan. 1 of the applicable calendar year until the day that year’s taxes are due, on or around April 15.
“Funding your 2024 IRA on Jan. 1, 2024, versus funding it on April 15, 2025, means that there is an extra 15 1/2 months of compounding for that single contribution,” said Joe Buhrmann, senior financial planning consultant at eMoney Advisor in Bloomington, Illinois, in an email.
“Magnify that over a lifetime of saving, and the figures can really add up. Think about that spread over 30 or 40 years of contributions,” Buhrmann said.
Delaying IRA contributions until the last minute may result in a couple of disadvantages:
— Lost tax benefits: Contributions to Roth IRAs are made with after-tax dollars, but earnings grow tax-free. If you wait to make your Roth contribution, you delay the potential tax-free growth of earnings.
— Reduced retirement savings: Procrastinating on IRA contributions may prevent you from maximizing your retirement savings. This can potentially lead to a shortfall in retirement savings, as there’s less time for contributions to grow.
“The procrastination penalty is a missed opportunity to have a much higher nest egg when you retire,” said Ines Zemelman, founder and president of TFX, a New York-based tax consultancy for U.S. expats, in an email. “The longer you wait, the less time you have to grow your money through compounding.”
An Opportunity Cost of $100K
For example, Zemelman said, if an investor puts $5,000 annually into an IRA with a 7% annualized return, waiting until the last minute could cost over $100,000 in potential earnings over 30 years. That’s the result of losing those 15 1/2 months when the money could be compounding.
Zemelman suggests using some mental tricks to avoid what’s often a natural inclination toward delaying contributions.
She recommends automating contributions by linking a bank account to an IRA. By setting the amount and frequency of contributions, IRA funding is simplified.
“People procrastinate because their drive to delay an action is stronger than their drive to perform an action,” she explained. “Calculate how much money you can miss by late contributing to your IRA account. The number you get should be your drive to start planning.”
Budget for Your Retirement Contributions
Another way to avoid procrastinating is to establish a retirement saving budget, said Jordan Mangaliman, CEO of GoldLine Financial in Fullerton, California, in an email.
“Create a budget that includes allocating a portion of your income toward retirement savings each month,” he said. “By treating retirement contributions as a regular expense, you’re more likely to prioritize them and avoid procrastination.”
Mangaliman also advises investors age 50 and older to take advantage of catch-up contributions. Those extra contributions can help accelerate your retirement savings and make up for any past procrastination.
[READ: How to Qualify for the Retirement Saver’s Match]
On the Sidelines as the Market Rallies
Investors who delay their IRA contributions should consider the costs of inaction and missing market returns, said Michael Primavera, retirement planning advisor at Daniel A. White & Associates in Lewes, Delaware, in an email. “Procrastination could mean missing out on day after day of all-time highs,” he said. “For example, if someone had funded their 2023 contribution on Jan. 1, 2023, in the S&P 500, they would be up about 30% so far.”
In contrast, a person waiting until April 15, 2024, to fund his or her 2023 IRA would have missed out on the market gains of 2023. Even if that investor didn’t use an S&P 500 index fund, other equities, such as the Nasdaq 100, non-U.S. stocks and domestic small-cap stocks all posted gains in 2023.
[READ: Retirement Accounts You Should Consider.]
Investing Sooner Rather Than Later
As a general rule, investing sooner rather than later is the better choice. But for investors who procrastinated with their 2023 IRA contributions, it’s still early enough to start funding an IRA for tax year 2024, and not wait until the last minute.
“The best time to contribute to an IRA is last New Year’s Day. The second-best day is today,” he said. “In either case, celebrate that you’re taking positive steps toward improving your financial security and well-being. Your future self will thank you.”
More from U.S. News
Don’t Overlook These New RMD Rules for 2024
Why a Stable Value Fund Belongs in Your Retirement Portfolio
How to Pay Less Tax on Retirement Account Withdrawals
Here’s How the Procrastination Penalty Could Cost Retirees originally appeared on usnews.com
