The penalty for procrastinating

According to Vanguard research, the difference between making an IRA contribution in January versus waiting until April of the following year can result in a “procrastination penalty.”

“Less time means there’s less opportunity for your investments to benefit from the power of compounding, which is when you generate earnings on top of earnings,” said Stephen Weber, an investment analyst with Vanguard Investment Strategy Group. “Losing even a few months can weaken the potential effects of compounding.”

“Procrastination penalty” over time ($165,000 contribution over 30 years):

Procrastination penalty chartSource: Vanguard.

Notes: This hypothetical example is provided for the purposes of illustration only. All figures are in today’s dollars. “Early bird” contributes January 1 of the tax year. “Last minute” contributes April 1 of the following year. Figure assumes each investor contributes $5,500 for 30 years and earns 4% annually after inflation. Projected balances are as of April of the ending year, when the procrastinating investor makes the final contribution.

The prevalence of postponing

If you wait until the last minute, you’re in good company. Many investors put off making IRA contributions until close to the tax-filing deadline. “Over the years, we’ve noticed that Vanguard clients generally make more than double the number of IRA contributions in April of the following tax year than in January of the current one,” said Mr. Weber. “While procrastination may explain the delay, investors may also be waiting to see if their annual income allows them to claim a deduction for a traditional IRA contribution.”

The power of pacing

While the best way to maximize tax-advantaged compounding is to contribute the maximum annual amount in January each year, that may not be realistic for many investors.

An automatic savings plan can help you make progress toward your annual savings goal over time. It’s easy to set up a regular transfer from your bank account to your IRA, and you can either enter a specific transaction amount or choose to maximize your IRA contribution—meaning we’ll do the calculations for you, factoring in your age and any IRS changes, so you can contribute the maximum allowable amount to your IRA over the course of the year.

“Along with giving your investments more time to grow, an automatic transfer is an easy way to ensure you won’t forget to save for retirement,” Mr. Weber said. “And it may be easier to fit small, regular contributions into your budget than to come up with a large, one-time lump sum contribution.”

The practicality of persistence

Whether you contribute to your IRA in January or the following April, the most important thing is to make a contribution each year. “The most reliable path to investing success is simply to keep saving year after year, regardless of market conditions,” said Mr. Weber. “That’s particularly true when it comes to saving for retirement because you generally have a longer time to save and invest.”

The above hypothetical example does not represent the return on any particular investment.

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

When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.

We recommend that you consult a tax or financial advisor about your individual situation.