|
 But there is an "I" in IRA for a reason: investors are in charge of
managing their accounts. And recent research by Vanguard finds that
many of us are leaving returns on the table due to an all-too-human
fault: procrastination in the timing of our contributions.
IRA savers can make contributions anytime from Jan. 1 of a tax year
up until the tax-filing deadline the following April. But Vanguard’s
analysis found that more than double the amount of contributions is
made at the deadline than at the first opportunity - and that
last-minute contributions dwarf the amounts contributed throughout
the year. Fidelity Investments reports similar data - for the 2013
tax year, 70 percent of total IRA contributions came in during tax
season.
Some IRA investors no doubt wait until the tax deadline in order to
determine the most tax-efficient level of contribution; others may
have cash-flow reasons, says Colleen Jaconetti, a senior investment
analyst in the Vanguard Investment Strategy Group. "Some people
don’t have the cash available during the year to make contributions,
or they wait until they get their year-end bonus to fund their
accounts."
Nonetheless, procrastination has its costs. Vanguard calculates that
investors who wait until the last minute lose out on a full year’s
worth of tax-advantaged compounded growth - and that gets expensive
over a lifetime of saving. Assuming an investor contributes the
maximum $5,500 annually for 30 years ($6,500 for those over age 50),
and earns 4 percent after inflation, procrastinators will wind up
with account balances $15,500 lower than someone who contributes as
early as possible in a tax year.
But for many last-minute savers, even more money is left on the
table. Among savers who made last-minute contributions for the 2013
tax year just ahead of the tax-filing deadline, 21 percent of the
contributions went into money market funds, likely because they were
not prepared to make investing decisions. When Vanguard looked at
those hasty money market contributions for the 2012 tax year,
two-thirds of those funds were still sitting in money market funds
four months later.
"They’re doing a great thing by contributing, and some people do go
back to get those dollars invested,” Jaconetti says. "But with money
market funds yielding little to nothing, these temporary decisions
are turning into ill-advised longer-term investment choices."
The Vanguard research comes against a backdrop of general
improvement in IRA contributions. Fidelity reported on Wednesday
that average contributions for tax year 2013 reached $4,150, a 5.7
percent increase from tax year 2012 and an all-time high. The
average balance at Fidelity was up nearly 10 percent year-over-year
to $89,100, a gain that was fueled mainly by strong market returns.
[to top of second column] |
Fidelity says older IRA savers racked up the largest percentage
increases in savings last year: investors aged 50 to 59 increased
their contributions by 9.8 percent, for example - numbers that
likely reflect savers trying to catch up on nest egg contributions
as retirement approaches. But young savers showed strong increases
in savings rates, too: 7.7 percent for savers aged 30-39, and 7.3
percent for those aged 40-49.
Users of Roth IRAs made larger contributions than owners of
traditional IRAs, Fidelity found. Average Roth contributions were
higher than for traditional IRAs across most age groups, with the
exception of those made by investors older than 60.
But IRA investors of all stripes apparently could stand a bit of
tuning up on their contribution habits. Jaconetti suggests that some
of the automation that increasingly drives 401(k) plans also can
help IRA investors. She suggests that IRA savers set up regular
automatic monthly contributions, and establish a default investment
that gets at least some level of equity exposure from the start,
such as a balanced fund or target date fund.
"It’s understandable that people are deadline-oriented," Jaconetti
says. "But with these behaviors, they could be leaving returns on
the table."
(For more from Mark Miller, see http://link.reuters.com/qyk97s )
(Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance.
Editing by Matthew Lewis)
[© 2014 Thomson Reuters. All rights
reserved.] Copyright
2014 Reuters. All rights reserved. This material may not be
published, broadcast, rewritten or redistributed.
 |
