Are you maximizing your contributions across all your retirement accounts? When do you make them? Vanguard research shows that more investors are taking advantage of early IRA contributions, but there are still quite a few who potentially pay the price for procrastinating.
Tips for maximizing your IRA
Read time: 3 minutes
There are multiple ways to save for retirement and build your net worthOpens in a new tab. Contributing to your employer’s retirement plan is a wise first step and the primary retirement savings strategy for many investors. But you can also save money in an IRA. An individual retirement accountOpens in a new tab is a personal, tax-advantaged account that investors can also use to prepare for retirement.
Keep a few benefits in mind when you’re considering an IRAOpens in a new tab:
1. Extra retirement savings. In addition to saving in an employer-sponsored
retirement plan, you can put even more money away for your future using
an IRA.
2. An IRA that’s right for your tax situation. Choose between a traditional IRA
or a Roth IRA. With a traditional IRA, your contributions may be tax-
deductible. Or with a Roth IRA, you pay taxes now—but not later, assuming
you satisfy two conditions.1 You can learn more about IRAs hereOpens in a new tab.
3. IRAs are for families too. If you have a child who’s earning income, they can
contribute to an IRA. Or if you’re married, think about a spousal IRA.
If you are contributing to an IRA, or thinking about opening one, here are a couple of tips that explain why contributing early in the year should always be a New Year’s resolution.
Tip 1: Contribute early to take advantage of compounding.
You can make an IRA contribution for a given year anytime between January 1 and the tax-filing deadline of the following year. You can make a 2024 IRA contribution until April 15, 2025. If you want to get a head start with your 2025 IRA contribution, you can make it as early as January 1, 2025. If you choose to wait to contribute, the deadline is April 15, 2026. If you wait until the tax deadline to make an IRA contribution, you'll miss out on more than 15 months of compounding. If you can contribute to your IRA, do it as soon as possible.
You’ll next want to decide how you’d like to contribute. You can get it all done at once with a lump-sum contribution. Or you can spread your money out over time by dollar-cost averaging.
Contributing a lump sum gets you the most value if you contribute at the beginning of the calendar year. That way, your money has more time to grow. But you may not have a lump sum of money available at once and it could expose you to higher risk.
You can also benefit from dollar cost averaging—which is investing a fixed dollar amount on a regular basis. Dollar cost averaging seeks to provide a hedge against market fluctuations. But with this approach, you won’t have as much money invested in the market right away—which could limit your return.
Which is better for you? We have an article to help you decideOpens in a new tab.
How much can an IRA grow?
This example is based on an investor making a $7,000 contribution in January of the current year (early) and realizing a 6% return versus a $7,000 contribution in April the following year (late) realizing a 6% return. In each example, you’re contributing a total of $210,000 to your IRA over the course of 30 years. The difference in earnings is due entirely to the timing of your contributions.
Note: This hypothetical example doesn't represent the return on any particular investment, and the rate isn’t guaranteed. The final account balance does not reflect any taxes or penalties that may be due upon distribution. Withdrawals from a traditional IRA before age 59½ are subject to a 10% federal penalty tax unless an exception applies.
Source: Vanguard.
Tip 2: Set up automatic contributions to benefit from tax-advantaged growth.
If you’re not able to contribute a lump sum early in the year, you can still participate in the tax-advantaged growth by contributing through an automatic contribution program during the year. For example, if you want to get to that $7,000 maximum for the 2025 tax year, consider establishing a $583 monthly contribution.
Investors who are age 50 or older can contribute even more—up to $8,000 annually—making this monthly contribution $666. We recommend that you consult a tax or financial advisor about your individual situation.
Tip 3: Pair contribution and investment decisions so contributions aren’t parked in cash.
Some investors seem to be focused on the act of making their contribution but forget to invest it—like it’s a check-the-box exercise. By separating the contribution and investment decisions, they can end up leaving money sitting in cash for months before they invest it, so they miss out on the potential returns that could have been earned.
To avoid paying the potential opportunity cost of being uninvested, it may make sense to consider investing right away in either a target-date fund or a balanced fund, especially if you have several years until retirement. If you’re closer to retirement, a more income-oriented investment might be your choice.
Investing your contributions and picking the right asset mix can be complicated. Learn how a financial advisor can helpOpens in a new tab.
Start saving more today
Adding an IRA to your savings strategy—on top of your employer’s plan—can help you save and invest even more for retirement. Consider saving in an IRAOpens in a new tab. There can be benefits and increased flexibility from investing in multiple retirement accounts. And by contributing to an IRA earlier in the year, you can give your money more time to grow. You’d also have more time to make your IRA investment decisions so you can avoid leaving your money in cash.
Already have an IRA? Make your annual contributions today.
Whenever you invest, there's a chance you could lose the money.
Target-date investments are subject to the risks of their underlying funds. The year in the investment's name refers to the approximate year (the target date) when an investor would retire and leave the workforce. The investment will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. A target-date investment is not guaranteed at any time, including on or after the target date.
Neither Vanguard nor its financial advisors provide tax and/or legal advice. This information is general and educational in nature and should not be considered tax and/or legal advice.
Dollar-cost averaging does not guarantee that your investments will make a profit, nor does it protect you against losses when stock or bond prices are falling.
1 Withdrawals from a Roth IRA are tax-free if you are over age 59½ and made your first Roth contribution at least five years before; withdrawals of earnings taken before age 59½ or five years may be subject to ordinary income tax, a 10% federal penalty tax, or both.