Many investors, instead of making their IRA contributions at the start of a tax year, don’t make them until 15 months later, during the last two weeks before that tax year’s filing deadline. Investing early in the tax year means the compounding clock starts sooner, Bruno said. “Over the course of your working years, the procrastination ‘penalty’ can really add up,” she said. “So if you fall in this camp, see if you can make a change this year and make your 2022 IRA contribution now.”
Investors might consider making a double contribution. If they haven’t yet made a 2021 IRA contribution, they could make both their 2021 and 2022 contributions now. It might be surprising that the timing of IRA contributions matters, but the compounded effect of early contributions can make a significant difference over the long run.
Take the example of two investors who both contribute $6,000 a year to their IRAs. Investor A makes her contribution on January 1 of each year; Investor B does so on April 1 of the following year. Just by contributing earlier, Investor A could potentially end up with almost $17,000 more than Investor B, based on the hypothetical illustration below.