Issue No. 226

Marrch 7, 2014

The Procrastination Penalty

Recently Vanguard published some research detailing when American investors typically make their IRA contribution for the year. Their findings were surprising, but certainly not shocking!

When Do You Make Your IRA Contribution?

Traditional and Roth IRAs play a very significant role in retirement planning as there are more than $5.7 trillion in these accounts, according to a 2013 study by the Investment Company Institute. Unfortunately, many Americans are paying a "procrastination penalty" by waiting a full 15 months beyond the earliest possible date to make their lump sum contribution.

Here is a chart from Vanguard illustrating when Vanguard investors make their annual lump sum IRA contribution.

As you can see, about 10% of lump sum contributions go in on the first month possible - which is best case! Another 10% are made in March of the following year - 14 months later. A full 25% get made in April...at the last moment possible!

What is the Actual Penalty?

Apparently, a good many IRA investors wait until the last minute before making their contributions, rather than doing so at the earliest possible time. In fact, over one-third of lump sum contributions are made in the last two months possible. What is the cost of this procrastination?

Vanguard makes an effort to quantity the cost, but it is very hard to determine. However, it would be safe to say that if the funds are sitting in a savings account earning very little for 15 months, then the cost could be very significant over time if this behavior continued for many years!

According to one accountant, contributing $5,500 to an individual retirement account each January, rather than in April of the following year, over 31 years (with an average annual 7% return) could boost the IRA balance by $55,000.

What is the takeaway from all this? When and how should you make your IRA contribution?