Contributing to an individual retirement account (IRA) each year is one of the best ways to save for retirement.
You can make contributions to your IRA around the first day of the new year and at any point throughout the year before the following tax yet, however it’s worth knowing the sooner you invest, the more time your money has to compound and grow.
Ultimately, the decision should be based on your own financial health and journey. Regardless of the timing you choose, it’s always important to remember that saving for retirement is always a step in the right direction. However, it is important for investors to be aware of the factors that determine the best time to make contributions to your IRA.
What is an IRA and how does it work?
An IRA is a tax-advantaged retirement account that individuals can contribute to as a way of saving for retirement. There are typically two IRA options for people to choose from:
- Traditional IRA: Contributions to a traditional IRA are made with pre-tax dollars, which means you could get a tax break on your contributions. Your contributions can then be invested and grow tax-free until you start making withdrawals during retirement.
- Roth IRA: In a Roth IRA, contributions are made with after-tax dollars, so there is no immediate tax benefit. However, your withdrawals during retirement are completely tax free making Roth IRAs a major tool in retirement savings.
Contributions for traditional and Roth IRAs are limited to $7,000 in 2024, or $8,000 if you’re age 50 or older.
When is the best time to fund your IRA?
When to contribute to an IRA, or whether to contribute to one at all, will depend on the circ*mstances of the individual making the contribution. You may want to prioritize other areas of your financial life, such as paying off any high-interest debt or building an emergency fund before contributing to an IRA. However, this doesn’t mean you should neglect an IRA completely.
Once you get your financial house in order, it may be time to contribute to your IRA. Here’s what to know about timing your contributions.
Early contributions have more time to compound
You can contribute to your IRA at any time during the year, and studies show that contributions made earlier in the year have more time to compound. The timing of your contribution may seem like a small decision, but the impact can really add up over time.
Someone who made a single contribution each January for 30 years would end up with nearly $18,000 more than someone who made the same contribution in April, according to a Vanguard study based on a $6,000 contribution limit and 4 percent annual returns. Each person contributes the same amount over 30 years, but the earlier contributions result in a higher ending balance due to the effects of compounding.
Of course, not everyone can afford to fully fund their IRA with a single contribution in January, but making contributions as soon as you’re able should help boost your savings over time. You might also consider making consistent contributions over time, which is a technique known as dollar-cost averaging.
Income considerations may force a delay
One reason to consider delaying IRA contributions is if you aren’t sure what your income is going to be for the year. Your income can impact whether or not your contribution to a traditional IRA is eligible for a tax deduction. Contributions to a Roth IRA aren’t allowed at all beyond certain income thresholds, although you can pursue a backdoor Roth IRA.
In 2024, the maximum income level where you can still make a full Roth IRA contribution is $146,000 for individuals and heads of household, and $230,000 for married couples filing jointly.
Bottom line
How and when to contribute to an IRA will ultimately depend on the specific circ*mstances of the individual making the contribution. If you aren’t sure how best to proceed, consider working with a financial advisor to determine your best course of action.
Contributions made earlier in the year have more time to compound than ones made at the deadline, but you may need to have clarity on your annual income in order to determine whether your contributions are eligible for a tax break or if you can contribute to a Roth IRA at all.
FAQs
You can make contributions to your IRA around the first day of the new year and at any point throughout the year before the following tax yet, however it's worth knowing the sooner you invest, the more time your money has to compound and grow.
What time of year is best to contribute to IRA? ›
By: Shelly Gigante. Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites. Highlight how much more your savings could grow if you fund your IRA in January of each tax year, rather than waiting to make a prior year contribution.
Is it better to contribute to IRA monthly or yearly? ›
In 2022, the maximum amount you can contribute to a Roth IRA is $6,000. Since you derive the most benefit from tax-free growth by allowing your funds to earn interest over time, contributing $500 monthly to your Roth IRA instead of once a year means you can earn an estimated $40,000 extra over your lifetime.
When should I invest in IRA? ›
The three times that are generally recommended are when you're young and at the beginning of your career, when your income dips, and before income tax rates increase. Using annual allowances as early as possible gives your money more time to grow in value.
What is the best way to contribute to an IRA? ›
Start saving as early as possible, even if you can't contribute the maximum. Make your contributions early in the year or in monthly installments to get better compounding effects. As your income rises, consider converting the assets in a traditional individual retirement account (traditional IRA) to a Roth.
Should you contribute to IRA when the market is down? ›
Investors can benefit from taking a long-term view and continuing to contribute to a retirement plan during a market downturn, as their investments will likely have the potential to rebound, given that retirement could last 30 years or more.
When should I not contribute to an IRA? ›
Traditional IRAs: Although previous laws stopped traditional IRA contributions at age 70.5, you can now contribute at any age. However, required minimum distribution (RMD) rules still apply at 73 in 2023 and 2024, depending on when you were born.
Is it smart to contribute to IRA right now? ›
So if you have enough money right now to max out your IRA — or even just a good chunk of change you could put in — put in that big contribution as soon as you can. The research supports investing the whole amount at once, up front, to take max advantage of all the time you have.
How much should I contribute to my IRA monthly? ›
Maxing out your IRA contributions is generally considered a good approach. So, assuming you are eligible to make the maximum contribution to your IRA, you can contribute $500/mo. if you're 49 years old or younger, or $583/mo. if you're 50 or older.
Should I max out my IRA in January? ›
Of course, not everyone can afford to fully fund their IRA with a single contribution in January, but making contributions as soon as you're able should help boost your savings over time. You might also consider making consistent contributions over time, which is a technique known as dollar-cost averaging.
You're never too old to fund a Roth IRA. Opening a later-in-life Roth IRA means you don't have to worry about the early withdrawal penalty on earnings if you're 59½. No matter when you open a Roth IRA, you have to wait five years to withdraw the earnings tax-free.
What is the best IRA to put your money in? ›
Overview: Top IRA accounts in June 2024
- Betterment. ...
- Interactive Brokers. ...
- Schwab Intelligent Portfolios. ...
- Merrill Edge. ...
- Fundrise. ...
- E-Trade. ...
- Firstrade. ...
- Fidelity Go. If you're looking to take a more hands-off approach to your portfolio, Fidelity Go is another robo-advisor option to consider.
Annual IRA Contribution Limit
The total contribution to all of your Traditional and Roth IRAs cannot be more than the annual maximum for your age or 100% of earned income, whichever is less.
How to get your IRA to grow? ›
The two primary ways an IRA can grow is through annual contributions and investment appreciation. However, there are limits to the annual contribution amounts allowed, and not all investments are successful in the long term.
How often should I contribute to my IRA? ›
For many people, contributing the annual maximum to their IRA all at once is difficult. If you can afford it, you can set up automatic payments that move money from your bank account to your brokerage account regularly, such as every two weeks or once a month. Setting up periodic contributions has another benefit, too.
Is it better to pay taxes on IRA now or later? ›
If you assume your taxable income during retirement will be lower, it may make sense to take the tax break now by contributing to a Traditional IRA, then pay taxes on the distributions during retire- ment – at the lower rate.
What is the deadline to fund an IRA for this year? ›
If you have a traditional IRA or Roth IRA, you have until the tax deadline, or April 15, 2024, to make contributions for the 2023 tax year.
How much does IRA contribution reduce taxes? ›
Reduce Your 2023 Tax Bill
For example, a worker who pays a 24% tax rate and contributes $6,500 to an IRA will pay $1,560 less in federal income tax. Taxes won't be due on that money until it is withdrawn from the account. The last day to contribute to an IRA for 2023 is the tax filing deadline in April 2024.
