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Why funding your IRA early might help maximize your return

Shelly  Gigante

Posted on February 03, 2022

Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
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Sure, you have until the tax filing deadline of next year to make contributions to your IRA that count for your taxes this calendar year, but some financial professionals say there may be a good reason to fund your account as early as possible in the calendar year — the opportunity for bigger returns.

Indeed, by maxing out your IRA in January (or at least during the first few months of the year) rather than waiting until the tax-filing deadline of the following year to make a prior-year contribution, you are effectively giving that money up to 15 extra months to deliver tax-deferred, compounded growth. Over time, that can potentially add up.

Assume you deposit $6,000 into your IRA (the combined total amount taxpayers under 50 are permitted to contribute to a traditional or Roth IRA as of 2022) at the beginning of the year, for 40 years. You will amass roughly $700,000 by the time you retire, assuming a moderate 5 percent annual return, said Leslie Beck, owner and principal of Compass Wealth Management in Rutherford, New Jersey, in an email interview. By making those same contributions at the end of the year instead, with all else held equal, you would have accumulated roughly $33,000 less.

Those 50 and older can contribute an extra $1,000 per year through catch-up contributions to their IRA, making the potential for tax-deferred growth greater still.

“It’s kind of crazy that people wait until the filing deadline of the following year to make their IRA contributions,” said Beck. “They really should be doing it at the beginning of the year, but I think that people wait because that’s when they’re doing their taxes so, mentally, they lump it all in together.”

Contribution rules

The IRS allows taxpayers to fund their IRA each year all the way up until the tax-filing deadline of the year for which the contribution is made. Meaning, you can fund your 2022 IRA at any time between Jan. 1, 2022, and the tax filing deadline in 2023.

You may contribute to a traditional IRA or Roth IRA whether or not you participate in a retirement plan through your job, such as a 401(k).1 However, you may not be eligible to deduct all of your traditional IRA contributions if you or your spouse are covered by a workplace retirement plan and your income exceeds certain levels. For the 2021 tax year, the deduction begins to phase out for single taxpayers with a modified adjusted gross income (MAGI) of more than $66,000, and married joint filers with MAGI of more than $105,000. The ability to deduct IRA contributions disappears completely for single filers with MAGI of $76,000 or more, and married joint filers with MAGI of $125,000 or more.

Your MAGI may also limit your ability to open a Roth IRA.

The ability to contribute to a Roth IRA for tax year 2021 begins to phase out for single taxpayers with MAGI of $125,000 or more, and for married taxpayers who file jointly with MAGI that exceeds $198,000, according to the IRS.

As such, those with unpredictable income or income that hovers close to the Roth phase out limits may need to wait until year-end to determine whether they qualify to contribute, said Beck.

The first-year hurdle

If, like most taxpayers, you generally wait until the tax-filing deadline to make a prior-year contribution to your IRA, but if you wish to start making current-year contributions in January, you’ll need to be financially prepared.

Not only will you need to fund your 2021 IRA before the tax filing deadline ($6,000), but you will also need to make your 2022 contribution (another $6,000, since the limit remains the same) as early as possible.

For an individual, that’s $12,000, and for married couples, that’s $24,000. (Calculator: How much should I save for retirement?)

Not everyone has that much extra cash on hand, especially after the holidays. The good news is that it only stings once — in the year you make the transition. Thereafter, you would be on track to make a single current-year contribution in January of each calendar year.

Two potential sources of cash for those who choose to make prior- and current-year IRA contributions in the same year are your tax refund, if you expect to receive one, and any year-end bonus you may receive from your employer.

You may also be able to tap your personal savings, said Beck, as long as you don’t dip into your emergency fund, which is needed to ensure that you can still pay the bills in the event of an unexpected layoff, illness, or unforeseen expense. Most financial professionals recommend setting three to six month’s worth of living expenses aside in a liquid, interest-bearing account, but those with job or income instability may need up to a year’s worth of living expenses socked away. (Related: How to build an emergency fund)

If you can’t come up with the money for a current-year IRA contribution on top of your prior-year contribution, Beck suggests funding your 2021 IRA retroactively by the tax filing deadline ( in April), as you normally would, and opening a separate savings account now to start setting money aside for a double contribution (2022 and 2023) in early 2023.

“If coming up with a lump-sum contribution is a problem, saving monthly for next year is certainly another way to do it,” said Beck, noting that those deposits should be held separate from your regular checking or savings account, because comingled money tends to get spent.

Assuming you are already positioned to fully fund your 2021 IRA this spring, you would then need to save $500 monthly, throughout this year, to sock away another $6,000 by January 2023.

To dollar-cost average, or not

Despite the potential benefits of putting your retirement savings to work sooner, there are some potential downsides to consider because many IRA investments are tied to market performance.

First and foremost is the risk inherent in market timing, said Bill Brancaccio, a financial professional and founder of Rightirement Wealth Partners in White Plains, New York.

Investing a lump sum ($12,000 for singles or $24,000 for couples) into the market at any single point makes your investment more vulnerable to market swings, he said. “What if you dump the money into the account January 1st and the market has a correction that year?” Brancaccio asked. “If you had put $450 in per month, you could have potentially done better.”

For most retirement savers, he said, dollar-cost averaging is recommended. This is an investment strategy in which you invest a smaller, fixed amount into mutual funds or retirement accounts at consistent intervals — thus spreading your stock purchases out over time. That helps to ensure that you won’t get stuck buying all your shares when they’re trading at a peak price. (Related: Understanding dollar-cost averaging)

David Demming, founder and president of Demming Financial Services Corp. in Aurora, Ohio, agreed that establishing a discipline of saving is more critical to long-term financial success than when you make IRA contributions. He advises most clients to schedule automatic monthly investments to their IRA so they balance out volatility in their portfolio.

“Time value of money is important, but paying yourself first is more important,” he said in an email interview. “We dollar-cost average, meaning we set up most qualifying Rothers with automatic monthly contributions debited from their bank accounts.”

By contributing monthly to their retirement account, he said, investors “develop the habit of saving systematically.”

Opinions differ, however. Scot Hanson, a financial professional with EFS Advisors in Cambridge, Minnesota, said retirement savers who have the cash and are eligible to contribute should take advantage of the opportunity for extended tax-deferred growth.

“I tell all my clients to fund their Roth IRAs in January of each year if they can comfortably write the check and expect to be eligible,” he said, noting that the sooner you contribute, the sooner your money can get to work.

As always, speak with your financial professional to determine whether an early IRA contribution makes sense for you

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This article was originally published in January 2018. It has been updated.


1 Internal Revenue Service, “Retirement Topics — IRA Contribution Limits,” Nov. 25, 2020.

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The information provided is not written or intended as specific tax or legal advice. MassMutual and its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own, and do not necessarily represent the views of MassMutual.