Contribute Early to Your IRA

Each year, investors seek ways to reduce their taxes, but one overlooked strategy is to contribute early to your IRA.

You can set up an IRA for 2008 at the start of the year until April 15, 2009, or the date you file your taxes, whichever is sooner. For many people, the tendency is not to contribute early to your IRA and instead wait until that final day. However, there is a great advantage if you contribute early to your IRA.

If you contribute early to your IRA every year, your money grows for a longer period of time because all earnings in an IRA either grow tax-deferred or tax-free, depending on the type of IRA you choose, so contribute early to your IRA to take advantage of this.

If you do not contribute early to your IRA and keep money in a taxable account, you will owe Uncle Sam more when you file your income taxes.

To contribute early to your IRA saves money, whereas to delay your contribution costs money, so contribute early to your IRA to make your money work for you.

Assume you have $4,000 earmarked for your 2006 IRA contribution sitting in a taxable account. ($4,000 being the maximum that you can contribute in 2006).

If you made your IRA contribution on the first day of eligibility (Jan. 2) and earned 8 percent annually, you would have $417 in earnings by April 15, 2007.

Wouldn’t it be nice to have the potential to earn an extra $417 in savings because you contribute early to your IRA? Contribute early to your IRA to earn more tax deferred money.

Assume you were one of the investors who did not contribute early to your IRA and delayed making a contribution until April 15, 2007. Further assume that if you did not contribute early to you IRA the money earmarked for your contribution stayed in a taxable account that earned the same 8 percent return from January 2006 to April 15, 2007.

If you were in the 40 percent tax bracket (federal and state combined), you would only accumulate $250.20 after setting aside the amount required to pay income taxes (40 percent of $417 = 166.80).



But that’s not all. Consider the savings that you would realize if you contribute early to your IRA every year over a long time period.

For example, if you contribute early to your IRA every year for 20 years and earned 8 percent annually, you’d have well over $8,000 more than if you waited until April 15th of the following year every year to make your contribution. Contribute early to your IRA to keep your hard earned money. These examples show how you can earn more money if you contribute early to your IRA.

Another Strategy to Save
Once you contribute early to your IRA, there’s another strategy that can help you save money and gain greater control over your assets called consolidation. contribute early to your IRA to take advantage of this strategy.

Since Congress established IRAs in 1981, millions of individuals have established IRAs at financial institutions.

Keep in mind that not all IRA vendors are created equal. The potential exists for asset allocation strategies not to be synchronized and for fees to be higher than needed. Understanding Your IRA Choices
There are two types of Individual Retirement Accounts: Traditional and Roth. With a Traditional IRA, you may be able to deduct all or part of your contributions if your Adjusted Gross Income doesn’t exceed certain limits. Even if you are ineligible to take a tax deduction, all earnings grow tax-deferred for as long as they remain in the account.

With a Roth IRA, all earnings grow tax-free and can be withdrawn tax-free, if you are over age 59 ½ when you start receiving payouts and have held the account for at least five years. You are eligible to establish a Roth IRA if your Adjusted Gross Income doesn’t exceed certain limits. Contribute early to your IRA to avoid taxes.