The Best Time To Contribute To Your IRA Might Not Be What You Think

Savers often scour the marketplace looking for great options to support their long term goals. Whether through advantageous interest rates or account types, people seek to put their money to work in the most effective way possible. One area where this is supremely effective is in the realm of tax-advantaged retirement accounts. The Traditional and Roth IRA are both fabulous vessels for growing your long term resources with important benefits baked into the process. A Traditional IRA allows you to contribute pre-tax dollars (that will be taxed later on, when you take distributions from the account). This gives savers the ability to maximize their growth potential today, and perhaps even boost tax refund amounts with the help of a key tax break.

The Roth IRA offers the opposite benefit. You'll contribute money that's been taxed already, but the growth you experience is treated like money you've owned the whole time, no matter how rapidly you experience ballooning value in the account. It won't be taxed later on and benefits from a lack of required minimum distributions, too. No matter the approach you take (although you can use both account types simultaneously if you wish), contributing money to your accounts is something that also benefits from a bit of strategy. For one thing, the period from January 1 to April 15 (or the alternative, specific date in April that's marked as tax day), you can contribute toward the present year or the previous year's limit. With that quirk in mind, it's worth contemplating how to best make the most of this 'annual' 15 month contribution window.

Every year you'll gain access to a brand new cap on retirement contribution allowances. In addition, as noted there is a bit of holdover regarding what you can contribute for the previous year until the tax deadline comes in April. This might give some savers the notion that they can simply wait until the end of the year to start contributing to their retirement accounts, reckoning that this extra four month window gives them enough time to hit their goals. But all kinds of stumbling blocks stand in the way of achieving this on a regular basis. Beyond the increase in routine expense loads that come during the holiday period at the end of each year, the rigors of routine budgeting and money management don't subside just because you've put off one piece of the puzzle for a few months.

Naturally, as you begin to set money aside in the new year for your retirement, if you have space leftover in the previous year's deposit volume it might make sense to assign some of your investment to that tax year. This can give you an increased overall limit to contribute in a given calendar year (although it doesn't actually change the total limit). But the best approach to managing your retirement savings is to go all in on the new tax year allowances as soon as they arrive. This way you won't be trying to play catch up every year when the calendar flips over and January comes around again.

January doesn't serve as only a psychological factor, however. For most people looking to budget around their everyday expenses and retirement goals, a steady outflow throughout the year is likely in the cards. This means that if you're contributing the maximum $7,000 per year then you'll be targeting a monthly deposit into your retirement accounts of around $580.

But there's an alternative strategy that can be even more beneficial for those who are able to swing it. Instead of smoothing out your contribution figures across the entire year, front loading your deposits at the beginning of the year gives your money the longest possible window of growth. This might come about as four monthly deposits of $1,000, and then the final eight months requiring $375 contributions, although everyone will approach this differently. Think about it: Experts consistently suggest starting your retirement savings in your twenties, ideally in the front half of this decade. This gives your money roughly four decades to expand in value and drastically reduces the amount of money you have to contribute to yourself when seeking to hit your future financial goals. Albeit on a much smaller scale, front loading as much of your annual contribution as you can gives those dollars critical extra months to work their magic and deliver compounded interest returns. The difference might not be Earth shattering, but any strategy you can leverage to maximize the earnings in your retirement account directly impacts the amount you have to invest yourself, improving your financial standing in the process.