Retirement and financial planning are all about being as efficient as possible with our money. There are many aspects involved such as taxes, investment returns, budgeting, and so on, but the bottom line is efficiency. I have found that our road to efficiency is often blocked by something called procrastination.
One way procrastination hurts us is the timing of our Roth IRA contributions. Roth IRAs are a common retirement savings tool, especially for younger generations. The timing of Roth IRA contributions can be a big factor in retirement savings.
If you are here for the cliff notes version, here is the take away: If you make your Roth IRA contributions at the beginning of the year, you can make significantly more money than if you were to wait until the tax deadline.
When should you make your Roth IRA contribution?
There are two common ways to contribute to a Roth IRA:
- Systematic monthly contributions
- Lump sum
The systematic contributions are typically withdrawn from a checking account and invested every month. This method may be the best for a lot of people because it is automatic – you never have to remember to write a check.
For individuals that contribute a lump sum to their Roth IRAs, I have a question for you – when do you make that lump sum contribution? The most common answer is March or April of the following year, or before the April 15th tax deadline. For example, in April 2026, you wrote a check for your 2025 contribution. You have until April 15, 2027 to make your 2026 contribution.
There isn’t anything wrong with this method until you look at what could happen if you contribute earlier.
How contributing early can make you an extra $120,000
The maximum contribution to a Roth IRA for 2026 is $7,500 ($8,600 if you are 50 or older), as long as your income is under the limits. For 2026, the ability to contribute phases out between $153,000 and $168,000 of modified adjusted gross income for single filers and between $242,000 and $252,000 for married couples filing jointly. What if you made that contribution at the beginning of the year instead of waiting until April of next year?
If we take an example of a 35 year old that plans on retiring at the age of 65, he will have 30 years of contributions to his Roth IRA. By contributing at the beginning of each year, every one of his contributions is invested more than a year longer than if he were making his contributions right before the tax deadline. He still contributes the same amount over a 30 year time period, but the early contributor always has an extra year of growth working for him.
Let’s look at the numbers. Say he puts in $7,500 every year for 30 years and earns 10% a year. Here’s what that looks like at age 65:
- Contributing at the start of each year: about $1,357,000
- Contributing a year later each time: about $1,234,000
- Difference: about $123,000
He will make over $120,000 just by making early contributions. He still contributes the same $225,000, but he will end up with significantly more money in retirement just by altering the timing of his Roth contributions. At the old 2017 limit of $5,500, the same math came to a little over $90,000, which is where the title of this post came from. Keep in mind, 10% is an assumption, not a promise. At lower returns the dollar gap is smaller, but early still wins.
Does the same hold true with a 45 year old, or 55 year old? Sure it does, the numbers just aren’t going to be as big because the time period will be shorter. When it comes to investing, the time value of money is a big factor.
Does this apply to federal employees?
Yes. A Roth IRA is separate from your TSP, so you can do both. If you are deciding where your Roth dollars should go, see should you invest in Roth TSP and how much should I have in Roth accounts? Before you count on tax-free withdrawals, understand the five-year rule for Roth TSP and Roth IRAs. And for the bigger picture, here is how to get a tax free retirement.
Again, financial planning really comes down to being as efficient as possible with our finances. There are many little things we can do, such as contribute to Roth IRAs at the beginning of the year, to improve our financial situation. If you would like to have a discussion about our financial planning process and how we can help, you can email me here, or schedule a short phone call here.
Brad Bobb, CFP®, Bobb Financial, is an expert in federal benefits and retirement planning for federal employees.
This article is for educational purposes only and is not individualized financial advice. Figures are illustrative.