The early bird catches the worm – and, in the investment world, also potential for greater returns. Think about this: IRA investors can make IRA contributions any time from January 1 of the tax year to the following year’s April tax-filing deadline. Yet, Vanguard reports that it receives more than double the amount of contributions in April than any other month of the year. Fidelity Investments reports similar data. For the 2013 tax year, 70 percent of total IRA contributions came in during tax season.
Of course, investors who put off making their contributions can miss out on a year’s worth of tax-advantaged compounding. Vanguard refers to this a “procrastination penalty.” In fact, the mutual fund company’s hypothetical example below shows how over 30 years, a “last-minute” investor could wind up with $15,500 less than an “early bird” investor, even assuming the same contributions and investment returns.
Vanguard also reports that 21 percent of investors who made last-minute contributions for the 2013 tax year chose money market funds. This underscores the detrimental truth that these investors are not thinking about or planning for the long-term. Amazingly, Vanguard also found that two thirds of the money market contributions made at 2012’s tax deadline – i.e., April 15, 2013 – still resided in money market funds four months later.
The lesson here is simple. Yes, sometimes it pays to take your time – fine wines age well and practice makes perfect on the golf course, but when it comes to your retirement accounts, procrastinate at your own peril. Setting up regular automatic IRA contributions, and directing a portion to equities from the start, can help you avoid the stress of the April tax deadline and increase your nest egg’s potential for growth.