The Power of Time for Building Wealth

The Power of Time for Building Wealth

Every year we hear the same comment from many of our clients, “I need to get my IRA contribution in by April 15”.  While it is true that your IRA contribution is due by April 15th of the following year, you can make that contribution on January 1 of the previous year – a full 469 days earlier. This is an opportunity for every investor.

 

If you make your contributions as early as possible or plan them out over the course of a full year, you can use the power of compounding to your benefit.

 

Let me give you an example. Starting in 2019, the IRA contribution goes up to $6,000 per year. Let’s assume that for the next ten years, you made your IRA contribution on January 1 instead of waiting until April 15 of the following year. Let’s also assume you were able to average 7% return per year, the average annual return of the S&P 500 Index for the last 50 years adjusted for inflation.

 

After ten years, just by investing early, your portfolio could grow by an additional $15,000. This example does use historical data and returns, but it also illustrates the powerful time value of money. You can try timing and outguessing the market but you can’t outguess the math of investing early.

 

If you cannot make the entire IRA contribution at once, you can still set up a plan and make your contribution on a monthly basis. Even this strategy will increase the entire value of your portfolio over time.

 

This year, when you make your IRA contribution for last year, why not also set up a plan for next year’s contribution as well. Call us if you have questions or need to know the limits for IRA contributions.

 

Dave Owens, CPA, CES is the President of Midland Trust Company.  Please consult your tax advisor before making any investment decision. 

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