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Managing Your Money

An Easy Way to Make $705 More in Your IRA

shutterstock_85769425.jpgTiming is important. While most financial advisers are focusing on getting last year's IRA funded before April 15th, consider this:

If you didn't fund your IRA on January 1st, you already missed out on a month or more of tax-free returns.

Funding your IRA at the beginning of the year (rather than the end) historically has resulted in higher returns of roughly $705 per year. This isnít about market timing, itís just about the time in the market. And all you need to do is be there when the markets open.

Why might you want to submit your financial homework 15 months before itís due?

Because youíll most likely end up with more money in the long run. If you fund an IRA now, you give that savings another year to grow, tax free. Letís take a look at what this means in dollar terms though.

 

Contributions

Final Value

Total Return

Difference from EOY

Fund in December

$126,500

$223,620

$97,119

-

Fund in January

$126,500

$239,834

$113,334

$16,215

Fund monthly

$126,500

$234,150

$107,650

$10,531

Returns are from the S&P500 Total Return index from Jan 1, 1990 through Dec 31, 2012. Assumes all dividends are reinvested, and that cash not invested earns no interest.

Since 1990, saving $5,500 in an IRA at the beginning of the year rather than waiting till the end would have resulted in an extra $16,215 in your account. Note that this is not about differences in the amount you contributedóevery case contributes $126,600 in total. Itís about the amount of time that money spends in the market, accumulating dividends and appreciating in capital.

Funding your IRA with $5,500 in January every year since 1990 would have resulted in an end balance of $239,843, compared to $223,620 for funding it in December. This equates to roughly $705 per year. Thatís $705 every year you earn just for showing up on time.

If you donít have the money sitting around to fund an IRA all at once (don't worry, most of us donít), you should still try to set up a savings plan to max-out your IRA by saving every month ($458 per month).

Setting up an auto-deposit which invests monthly is still better than waiting till the end of year. We can likewise see that contributing monthly would have resulted in $10,531 more in your account on between 1990 and 2012 than if you saved your money in a checking account, and invested at the end of the year. Thatís about $500 of extra money every year.

That's a lot of worms.

This post was written with Dan Egan and originally appeared on the Betterment.com blog.

Want to know more about Betterment? As the most trusted online financial advisor, Betterment offers a fully diversified investment portfolio of 12 global asset classes, optimized to provide you the best possible returns for both retirement planning and wealth building. Betterment costs 0.15% of assets under management annually for a portfolio of $100,000 or more. Learn how to open or how to rollover an IRA at Betterment.

Determination of most trusted online financial advisor reflects Betterment LLC's distinction of having the most customers in the industry, made in reliance on customer counts, self-reported pursuant to SEC rules, across all online-only registered investment advisors.

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