Now is the Best Time To Fund Your Traditional IRA

Traditional IRAs are retirement savings accounts that allow you to contribute pre-tax income that grows tax-deferred until withdrawn for retirement. Before 2020, people couldn’t contribute to a traditional IRA if they were 70½ or older. However, now there are no age restrictions on opening and contributing to a traditional IRA or Roth IRA. So, here’s when experts say the best time is to start.

Is There a Right Age for Opening an IRA?

There is no minimum age to open a traditional IRA, but the idea is to start as young as possible so that money has a long time to grow. When investors start contributing to their retirement accounts will depend on their circumstances and retirement savings goals. However, financial experts recommend opening an IRA as early as possible.

“You should consider opening an IRA as soon as you have earned income (that’s a requirement) and have maxed out any employer 401(k) match (that’s essentially free money),” said Tom Buckingham, chief growth officer at Nassau Financial Group. 

Traditional IRAs are tax-advantaged retirement savings accounts. Investors make their contributions pre-tax. The initial investment and any compounded earnings are not taxed until it’s time to withdraw.

When To Contribute: The Sooner, the Better

Investors can open a traditional IRA anytime, but there are significant benefits to starting a retirement savings account earlier.

“It is never too early to begin investing towards your retirement—in fact, parents can open an IRA for their children while they’re still in diapers,” said Rita Assaf, vice president of retirement products at Fidelity Investments. “The only eligibility requirement is to have ‘earned income.’”  This means any W-2 income from summer jobs, modeling gigs, or age-appropriate work would qualify, as would self-employment income from washing cars, dog walking, or babysitting, for example. 

Opening a traditional IRA at a young age teaches important financial literacy skills. It also gives investors the all-important element of time. Compound interest can build a strong savings foundation. Contributing the maximum investment amounts will also boost retirement savings.

“The earlier you invest, the longer your investment earnings can compound over time,” Buckingham said. 

Traditional IRA Contribution Limits

The IRA contribution limits will affect how much you can invest towards retirement every year. 

“Individuals under age 50 with earned income can contribute up to $7,000, with an additional $1,000 for those over 50,” said Megan Miller, a senior wealth advisor and managing director at MAI Capital Management.

Or, if your income is lower than that ceiling, you can contribute up to the total of your maximum taxable compensation. However, to be eligible to contribute, you must have earned income in the same year that you invested in the IRA.

You might also be able to claim deductions on federal income tax for your traditional IRA contributions, which will vary depending on the filing status and whether you’re covered by a retirement plan at work. If you do have access to a retirement plan through your job, the IRS offers a chart to check whether your Modified Adjusted Gross Income qualifies for deductions.

“The amount you contribute to your IRAs cannot be greater than the income you earn each year,” Assaf said. “But it’s important to keep in mind that these restrictions differ from year to year, so it’s a good idea to regularly check in on the latest limits and restrictions.” 

Annual IRA Contribution Deadlines

There is a deadline to contribute to a traditional IRA within that year’s limits. “The deadline to make contributions is the same as your tax deadline, which is mid-April for most Americans,” said Dave Fortin, a c financial analyst (CFA) and co-founder of FutureMoney. 

For example, investors looking to contribute to their traditional IRA for 2024 can contribute up to their maximum limit ($7,000 or $8,000) anytime between January 1, 2024, and the tax-filing deadline in the following year, April 15, 2025. If April 15 for a given year falls on a weekend or holiday, the deadline will be the following business day.

Early Contributions Have More Time To Compound 

Just like opening a traditional IRA, contributing earlier is better. Though investing any time is better than not at all, waiting until the tax deadline to make an IRA contribution might mean missing out on more than 15 months of compound interest. 

“Contributing closer to Tax Day gives your contribution a shorter time period to compound interest, which can limit the full ability of your savings to grow interest,” Assaf said. So, it’s better to contribute early in the year to benefit from interest. 

Examples of How Much Your Traditional IRA Can Grow

There are so many factors that can affect how much these retirement savings accounts will grow, including income, annual contributions, tax rate, and marital status. Let’s look at a few general examples of how a traditional IRA can grow. 

Dave is 25 and is opening a traditional IRA account for the first time, so his account balance is $0. Dave’s adjusted gross income is $50,000. Dave is single and invests the same amount—$5,000—every year into a traditional IRA for 30 years at a 7% return rate. If all these factors stay the same every year, Dave will have roughly $472,304 in his traditional IRA, before taxes are applied when he chooses to withdraw funds. 

However, Sarah is 30 and is also just opening a traditional IRA account for the first time. Sarah has a higher adjusted gross income of $75,000 and is married to a partner who makes $60,000 a year. Sarah contributes the current maximum amount ($7,000) for 30 years at a slightly higher return rate of 9%. Sarah usually contributes between January and February to maximize the compounding effect of her contribution. Even though she started later, when she’s 60, she’ll have $954,153 in her traditional IRA account. 

It’s important to remember that no two financial circumstances are the same. While Dave has a lower income, he is younger than Sarah and single when he opens his account. However, the IRA account balance is not their whole retirement picture, as your retirement timing can be dictated by factors like mandatory age requirements or early retirement options in your field, as well as family and health needs. 

Having a high IRA balance has to be weighed within the larger context of other “expected sources of income from Social Security, pensions, annuities, and rental income, along with the value of your personal investments,” said Buckingham. “Your anticipated recurring monthly expenses, expected inflation, and your own health are other important factors to consider.” 

Also, in real life, most people adjust their contributions every year to reflect the contribution limits. How much you contribute every year will likely fluctuate over three decades, as will interest rates. 

The Bottom Line

When it comes to saving for your retirement, start as early as possible. A traditional IRA allows investors to contribute up to $7,000 of their earned income in a year, and an extra $1,000 if they’re 50 or older.

Contributing every year before retirement can build a secure foundation of wealth to reach your financial goals. Make contributions a priority and a habit. Contributing a lump sum may not always be feasible, so set up periodic automatic investments to reach the maximum contribution limit by the April 15 deadline.

To define where your IRA sits within your larger retirement goals, reach out to a financial advisor for tailored guidance.