When Do You Make Your IRA Contribution?

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February 27, 2006

Eligible taxpayers can make their 2005 Individual Retirement Account (IRA) contributions up until April 16, 2006. Many people chose to wait up until April 16 each year to make their prior year contribution. Are you one of those people? You may want to reconsider…

A man plans to begin making “annual” IRA contributions of $4,000 beginning on April 16, 2007 for his 2006 tax year. He continues making his $4,000 contributions on April 16 each year until the year 2036. Overall, he will make 30 payments totaling $120,000. Assuming an 8 percent annual return (compounded monthly), he will have accumulated approximately $479,000 as of the date of the last payment.

This person’s spouse also plans to begin making contributions to an IRA for her 2006 tax year. However, she begins making monthly payments of $333 as of January 2, 2006. She makes 360 monthly payments of $333 for a total of $119,880. Assuming the same 8 percent return (compounded monthly), she will accumulate approximately $511,000 as of April 16, 2036. This is $32,000 more than her husband has accumulated by the same date. The earlier you start, the faster your tax-deferred earnings will begin to grow.

For most people, monthly contributions are easier to fit into the budget than one large annual contribution. If your retirement accounts are invested in the stock market, monthly contributions may also provide some protection against the ups and downs of the stock market.

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