Avoiding the “procrastination penalty”

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, 2023, through the tax-filing deadline of April 15, 2024, to contribute to your IRA for the 2023 tax year. It seems like a sizable length of time, but it's one not all investors are taking full advantage of. 

Only a small portion of investors make their contributions early, and many investors wait until the last possible moment to contribute. Although these contributions are applied before the deadline, you could be missing out if you wait.

Compounding: It's in your best interest

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.

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 all at once. (For 2023, $6,500 annually, or $7,500 if you're age 50 or older. For 2024, $7,000 annually, or $8,000 if you're age 50 or older.) That's okay. 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. That 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

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.
• Nonretirement account transfer. If you have an individual or a joint account through Vanguard, you can transfer money from your settlement fund to your IRA. You can also transfer assets from a nonretirement account at another company to your Vanguard IRA.

It takes 2

Making contributions to your IRA (and doing so early) is important. But did you know you can contribute to an IRA on behalf of a nonworking spouse? It's 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 SECURE Act (Setting Every Community Up for Retirement Enhancement) in December 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. 

Read more about Vanguard IRAs, including contribution limits, eligibility, and tax deductibility.