Roth Rules for Retirees: Earn with Early Contributions

It’s usually nice to have a grace period, a little extra time to pay a bill. But IRA investors who rely on the government’s generous deadline for annual contributions are usually hurting themselves, not Uncle Sam.

Contributions for 2009, for example, could have been made as early as Friday, Jan. 2, 2009, assuming your broker, bank or fund company was closed New Year’s Day. But you have until April 15 of this year to make the 2009 contribution, unless you file your tax return earlier, which makes the filing date the deadline.

Sure, waiting gives you lots of flexibility, and more time to scrape the money together. But waiting until the last minute also means missing out on 15 months of tax-sheltered growth.

What would that cost? It depends, of course, on your potential investment returns. And if the markets are sinking, postponing a contribution could allow you to invest at bargain prices, boosting your returns.

But most IRA investors are not trying to time the market, or are not very good at it if they do try. IRAs are long-term investments generally made with a certain faith that the markets will rise over time. Since markets generally do go up over time, delaying a contribution means missing out on potential gains in the average year.

Hilliard Lyons, a Louisville, Ky., wealth management firm, analyzed the cost of delaying a $5,000 IRA contribution for 2009. Assuming an investment return of 8% a year, this investment would earn $520 from Jan. 2, 2009 to April 15, 2010.

Those gains would be tax-free in a Roth IRA. In a traditional IRA, the gains would be taxed as income upon withdrawal. But that could be many years off, perhaps decades.