The Early Contributor…
It’s that time of year again, tax time. It’s also the time of year when many people contribute to their IRAs for the previous year. As many of you know you have until April 15th of the following year to contribute to your IRA. If you are going to contribution, why wait until April of the following year? You may be better off contributing to your IRA on the first of January each year. If you are not able to make a lump sum contribution at the beginning of the year, try to make periodic contributions throughout the year. Divide your contributions it into 12 monthly payments or 24 semi-monthly payments. Contributing to your IRA in the beginning of the year for the current tax year, gives you 15 months of additional compounding and potential positive returns. Choosing the monthly or semi-monthly approach allows you to dollar cost average into your investments allowing you to potently lower you overall cost basis by purchasing more shares when the market dips and prices are lower. The earliest you could have funded your IRA for 2015 was January 1, 2015. That is fifteen and one-half months before the latest funding date of April 18, 2016. If your IRA earned 6.5%, funding it on January 1, 2015 instead of April 18, 2016 could mean a significant difference in its value over time. Below is an illustration showing the benefits of contributing to an IRA in January of the current year compared to April the following year.
|IRA Contribution January 1, 2015||IRA Contribution April 18, 2016||Difference|
|Amount you contribute||$5,500||$5,500|
|Balance on Dec. 31, 2017||$6,261||$5759||$502|
|Value on Dec 31, 2037||$252,448||$227,009||$25,439|
*Assumes a hypothetical 6.5% annual return, compounded monthly. This example is for illustration only and does not predict or guarantee the performance of any investment. For those of you that will have trouble meeting that deadline you are in luck this year as you have a few extra days due to a national holiday. This year for most people, IRA contributions are due by April 18, 2016. The tax deadline was pushed back by the Emancipation Day holiday. However, residents of Maine and Massachusetts have until April 19, 2016 to make their 2015 IRA contributions thanks to the Patriots’ Day holiday celebrated in those states. The bottom line….. The longer your money stays invested, the more time it has to grow. Fund your IRA at the earliest possible date and you could benefit greatly. Or choose a periodic investment plan that fits your budget. If you need help setting up a monthly contribution to your IRA account just give us a call and we will be glad to help. Wells Fargo Advisors Financial Network and its affiliates do not provide legal or tax advice. Transactions requiring tax consideration should be reviewed carefully with your accountant or tax advisor. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state. Traditional IRA distributions are taxed as ordinary income. Qualified Roth IRA distributions are not subject to state and local taxation in most states. Qualified Roth IRA distributions are also federally tax-free provided a Roth account has been open for at least five years and the owner has reached age 59 ½ or meet other requirements. Both may be subject to a 10% Federal tax penalty if distributions are taken prior to age 59½. A periodic investment plan such as dollar cost averaging does not assure a profit or protect against a loss in declining markets. Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.