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Avoiding the “procrastination penalty” | Vanguard


Points to know:

  • You can make IRA contributions up to 15 months before the tax-filing deadline.
  • The earlier you contribute, the earlier compounding can help your investments grow.
  • Some circumstances might prevent you from contributing; we discuss how to handle them.
  • Consider the earnings potential―not just for yourself but for others in your life.

A penny saved is a penny earned. So why not save sooner?

You have just over 15 months to make an IRA contribution for a particular tax year. For example, you have from January 1, 2020, through the tax-filing deadline of April 15, 2021, to make a contribution to your IRA for the 2020 tax year. It seems like a sizable length of time, but it’s one not all investors are taking full advantage of.

It may surprise you to learn that only a small portion of investors are making their contributions early, and many investors wait until the last possible moment to contribute. Although these contributions are being applied before the deadline, you could be missing out if you wait until the 11th hour.

Compounding: It’s in your best interest

You may ask, “Why contribute early?” Simple: compounding. When you make an initial investment (known as principal), you may earn a percentage in returns. If you reinvest any dividends you accumulate, your investment could generate even more earnings than regular interest. If you’re interested in learning more about compounding, take a look at the video here.

The longer you wait to invest, the less time you have to reap the benefits of compounding. If you’re 30 years away from retirement and wait until the last minute to contribute each year, that’s even more missed potential over the course of 3 decades. We call this the “procrastination penalty.”

The waiting game

Though it’s referred to as the “procrastination penalty,” let’s be clear: Not all individuals who wait to invest are procrastinating. Some may have specific challenges or concerns about their ability to contribute, like not being able to invest the full IRA maximum at once (for 2020 and 2021, $6,000 annually, or $7,000 if you’re age 50 or older). That’s okay―you don’t need to. You can start by contributing a smaller amount. You can also schedule multiple contributions over the course of the year, rather than invest a single lump sum. This allows you to take advantage of dollar-cost averaging.

Or maybe you’re waiting to contribute because you first need to determine your eligibility based on your modified adjusted gross income (MAGI). Depending on how much you earn in a given year, you may not be eligible to deduct the full amount of your traditional IRA contribution or make any contribution to a Roth IRA. In situations like this, it’s best to discuss your options with a qualified tax professional.

Make a plan

So when should you contribute? Early! The earlier you invest, the earlier your principal can start earning for you. Here are some ways to contribute:

  • Electronic bank transfer. You can link a personal bank account to your Vanguard IRA® and use it to make contributions.
  • Automatic investments. With automatic investments, you decide how much and how often to contribute. Or you can choose to maximize your IRA contribution to ensure you reach the annual limit allowed by the IRS.
  • Transfer from a nonretirement account. If you have an individual or a joint account through Vanguard, you can transfer money from your settlement fund―Vanguard Federal Money Market Fund―to your IRA.

It takes 2

You know the importance of making contributions to your IRA (and doing so early). But did you know you can contribute to an IRA on behalf of a nonworking spouse? This is a great way to boost your retirement savings as a couple.

Generally, individuals without earned income aren’t eligible to contribute to tax-advantaged retirement accounts, like IRAs. But if you’re married and file jointly, you can contribute to an IRA on behalf of your spouse whether or not they received compensation for the year.

The passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December of 2019 offered yet another advantage. In the past, you could only contribute to a traditional IRA until you reached age 70½. But the SECURE Act removed that limitation. In other words, even if your spouse is over age 70½, or retired, you can still make contributions on their behalf provided you have earned income for the year.

You can read more about Vanguard IRAs, including contribution limits, eligibility, and tax deductibility, here.

Take action today

The clock is ticking. The deadline to contribute to an IRA for the 2020 tax year is April 15, 2021, so don’t wait. Give your investments more time to compound and grow. It’ll be worth it!

Explore the benefits of an IRA

Important notes:

All investing is subject to risk, including the possible loss of the money you invest.

A plan of regular investment cannot ensure a profit or protect against a loss.

You could lose money by investing in Vanguard Federal Money Market Fund. Although the fund seeks to preserve the value of your investment at $1 per share, it cannot guarantee it will do so. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund’s sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.

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