Avoiding the “procrastination penalty”
Avoiding the “procrastination penalty”
Points to know:
- For each year, you can make IRA contributions from January 1 until the tax-filing deadline, which is typically April 15 of the following year.
- The earlier you contribute, the sooner 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 your nonworking spouse.
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, 2024, through the tax-filing deadline of April 15, 2025, to contribute to your IRA for the 2024 tax year. It seems like plenty of time, but not all investors manage to take full advantage of the opportunity.
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, that money can generate its own earnings. If you reinvest that money, then both your investment and its earnings will generate additional earnings, offering you greater potential for growth.
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 chart below shows the difference that contributing early can make over the course of 10, 20, and 30 years. The difference in earnings is based entirely on the timing of your contributions.
This example is based on an investor making a $7,000 contribution in January of the current year (early) and realizing a 6% return versus a $7,000 contribution in April the following year (late) realizing a 6% return. In each example, you're contributing a total of $210,000 to your IRA over the course of 30 years. The difference in earnings is due entirely to the timing of your contributions.
Note: This hypothetical example doesn't represent the return on any particular investment, and the rate isn't guaranteed. The final account balance does not reflect any taxes or penalties that may be due upon distribution. Withdrawals from a traditional IRA before age 59½ are subject to a 10% federal penalty tax unless an exception applies.
Source: Vanguard.
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 2025, $7,000 annually, or $8,000 if you're 50 or older.) That's okay. You can start by contributing a smaller amount. You can also set up automatic investments by scheduling multiple contributions over the course of the year rather than investing a single lump sum. You can even set it up to maximize your contribution amount over the course of the year. 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. Read more about Vanguard IRAs, including contribution limits, eligibility, and tax deductibility.
Make a plan
The earlier you invest, the earlier your IRA 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 joint account through Vanguard, you can transfer money to your IRA. You can also transfer assets from a nonretirement account at another company to your Vanguard IRA.
Nonworking spouses can save too
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.
And if you or your spouse are 50 or older, you can make catch-up contributions to save even more.
Take action today
The deadline to contribute to an IRA for the 2025 tax year is April 15, 2026, but you don't have to wait until then. Instead, invest earlier to help give your money more time to grow. It could help you potentially enjoy a more comfortable retirement.
Contribute to your IRA today
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.
We recommend that you consult a tax or financial advisor about your individual situation.