Each year, investors are allowed to contribute to their individual retirement account, but you shouldn’t wait until the last minute. With exchange traded funds, savers can diversify with broad market exposure in an IRA portfolio.
According to Vanguard, traditional and Roth IRA contributions made by Vanguard customers between 2007 and 2012 tax years reveal that on average 41% of dollars contributed to IRAs for a given tax year are invested between January and April of the following year, right up to Tax Day, reports Jonnelle Marte for the Wall Street Journal.
Investors can take as long as April 15, 2014 to contribute to an IRA for the 2013 tax year.
In contrast, the study revealed that only 10% of dollars contributed were in January of the corresponding tax year, the earliest month contributions can be made – investors can begin contributing to their IRAs for the 2014 tax year beginning January 2014.
While there are legitimate reasons for delaying contributions, such as calculating income for the prior year to qualify for deductible contributions, some advisors argue that investors should kick this habit.
“As humans we naturally procrastinate,” Mackey McNeill, an accountant and financial advisor, said in the article.
Procrastinating would force investors to miss out on up to 16 months of potential gains – the period between January of the tax year up to Tax Day in April during the following year, along with potential compounded gains year over year.
McNeill calculates that an investors who contributed about $170,500 at the start of January each year over 31 years at a hypothetical 7% return would end up with $83,000 in additional savings after 30 years, compared to someone who invests the same amount each April 15 of the following year.
For the 2013 and 2014 tax years, traditional and Roth IRA contributions are set at $5,500 for those under 50, and investors 50 and older can contribute as much as $6,500. [How to Use ETFs in an IRA]
Investors can use ETFs in their traditional and Roth IRAs. The funds trade like any regular stock, which means investors can buy and sell ETFs on a brokerage exchange. Additionally, a number of online brokers offer commission-free ETF trades, which allow investors to rebalance or add some ETF positions free of charge. [Six Popular Commission-Free ETF Trading Platforms]
For more information on saving toward retirement, visit our retirement category.