Published February
2004
Try
to fully fund your IRA early in the year
As
an investor, if you want to get the new year off to a good start, consider
fully funding your IRA right away. It’s a smart move that can pay off
for you — perhaps even more than you’d think.
You’ve got until
April 15 to put in the maximum of $3,000 (or $3,500 if you’re 50 or older)
into either your traditional or Roth IRA for last year (2003.) So, if
you haven’t completely funded your IRA for 2003, take care of that first.
But after you’ve “maxed out” on your IRA, don’t wait another year to fund
it for 2004; the earlier you make the contribution, the sooner your money
can start working for you.
Do early contributions
really make that much of a difference? Consider this: To fund an IRA for
any given year, you’ve got 15 months, from Jan. 1 of one year until April
15 of the next. By consistently funding your IRA at the beginning of that
15-month time frame, rather than at the end, you could accumulate a lot
more money.
How much more? Suppose
Mary is age 35. For the next 30 years, she puts the maximum allowable
amount into a traditional IRA that earns a hypothetical 8 percent a year.
At the end of that time, if she had waited until April 15 every year to
make the contribution, she’d have accumulated $521,117.
But if she had fully
funded her IRA at the beginning of each year, she’d end up with $610,372
— a difference of nearly $90,000. (This calculation assumes you make the
maximum contribution each year, including “catch up’’ contributions, based
on future IRA limits, as established by recent tax law changes. Also,
the 8 percent rate of return, which is calculated on an annual basis,
is for illustrative purposes only; it does not represent any currently
available investment.)
As you can see, you’ve
got some pretty tangible reasons to fund your IRA early. So, what’s stopping
you?
If you’re like most
people, you’ll face at least two barriers to getting your IRA contributions
in early. The first of these obstacles, not surprisingly, is procrastination.
Whether we like it or not, many of us put things off until we absolutely
have to take care of them. So, if we know that we’ve got until April 15
to put funds in an IRA, we wait until April 15.
How can you combat
this tendency to delay taking action? Try sending yourself reminders.
During the early weeks of the new year, put notes on your calendar or
your electronic organizer, reminding yourself to put money in your IRA.
By pestering yourself, you just might make the right moves.
The second barrier
to funding your IRA early is a potentially more serious one: lack of money.
It’s certainly not always easy to come up with $3,000 or $3,500 at one
time. After all, you’ve got your share of bills to pay — and, in the early
part of the year, when you’re just coming off the holiday season, you
may have taken on more debt. Where can you get the money for your IRA?
There’s no easy answer,
but try to be creative. Perhaps you’ll get a tax refund. Or maybe you’ve
got some funds sitting in a money market account. Or, you could possibly
cut back on some of your expenses. You know your situation better than
anyone; if you look for ways to free up money, you’re likely to find them.
No matter when you
do it, it’s important to fully fund your IRA, and the earlier, the better.
Try to get accustomed to contributing the maximum early in the year, every
year. That’s a habit you won’t want to break.
Eric Cumley is an
investment representative with Edward Jones Investments at 1201-C SE Everett
Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is
an NYSE-member investment firm with more than 8,000 locations nationwide.
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