Some of the most successful retirees we see at Simply Money Advisors pay attention to the little details long before they retire. Increasing 401(k) contributions when IRS limits go up. Refinancing their mortgage to reduce their monthly payment. Tracking expenses.
If you want to follow in their footsteps, we have a question for you: Have you thought about your traditional IRA or Roth IRA lately, or are they only something that cross your mind around tax time?
Because a lot of times, contributing to one of these accounts is an afterthought. This is especially true with a traditional IRA since it typically uses pre-tax money, meaning it lowers your taxable income.
Essentially, for many people, contributing to a traditional IRA solely becomes a last-ditch strategy to lower their tax bill.
While this isn’t ‘wrong,’ per se, it’s still shortsighted. Because if this describes what you’re doing, just know that this habit could be hurting your future self.
Here’s what’s going on: the rules for traditional IRAs and Roth IRAs give you 15 months to contribute for a calendar year, with the deadline being Tax Day of the following year. This means, for example, you actually have until April 15, 2020, to make your full 2019 contribution ($6,000 if you’re younger than 50; $7,000 if you’re 50 or older).
But waiting until that deadline in the following year means you’ve waited 15 months from the moment at which you can legally start to invest your money! If this is how you approach contributing, realize that you’re constantly playing catch-up, not to mention you’re giving your money less time to grow and compound.
In fact, a study from Vanguard found that contributing to your traditional IRA in April of the following year could mean you’ll have 10% less over 30 years than if you had contributed in January of the previous year.
Why shortchange yourself when the situation is completely avoidable?
The Simply Money Point
We know life can get busy. Your IRA probably isn’t top of mind right now, especially since all the holiday shopping bills are beginning to hit your mailbox or inbox.
But you should take the time to pay attention to the little details since every little bit helps when it comes to retirement. This means, if you can, making your full contribution to your traditional IRA or Roth IRA for 2019 as soon as possible. Don’t wait until April of next year.
Otherwise, you’re just imposing a ‘procrastination penalty’ on yourself – and potentially losing out on future retirement income.
To learn more about retirement planning – including the 7 simple steps to get you on the right track – visit our Retirement Resources library.