Time is 'the greatest financial asset,' says IRA expert — and the IRS just gave retirement savers more of it. Here's how to take advantage

"The greatest financial asset anyone can possess is time."


The IRS announced Monday that it has extended the deadline to make 2020 contributions to certain retirement plans to May 17, in line with the extended tax filing deadline. Taxpayers have until then to make so-called prior-year contributions to Roth and traditional IRAs, as well as certain health and education savings accounts, and have them count on their 2020 tax return.

If you have a traditional IRA or a health savings account, for example, making a contribution before the deadline can lower the amount of income on which you'll owe taxes. But regardless of which type of account you have, experts say you shouldn't wait until the last minute if you intend to make a contribution. Here's why.

Contributing before May 17 can lower your 2020 tax bill

A quick review of the two types of IRAs. With a Roth IRA, you contribute money after you've paid taxes on it. The money in your account grows tax-free, and you can generally withdraw your funds tax- and penalty-free in retirement. Contributing to a Roth IRA for 2020 won't have an effect on your taxable income, although there are other advantages. (More on those, below.)

A traditional IRA, however, is typically funded with pre-tax contributions, and you pay income taxes on the money that has grown tax-deferred when you withdraw your funds in retirement. If you have this type of IRA, you still have time to contribute and possibly lower your tax bill.

If you're under age 50, you can contribute up to $6,000 into either type of IRA for 2020. Depending on how much money you make, you can deduct some or all of your traditional IRA contribution from your taxable income for 2020, thereby lowering what you'll owe when you file.

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How catching up on IRA contributions can set you up for retirement

As a general rule, you should be contributing as much as you can, as early as you can, to any type of retirement account, says IRA expert Ed Slott, a certified public accountant and founder of Ed Slott and Company. "The greatest financial asset anyone can possess is time," he says. "For young people, the ups and downs of the market today are going to be blips in your memory in 30 years when you take it out."

In other words, the sooner you invest, the more time your money has to compound. If you can afford it, you should ideally make the maximum contribution to your IRA in January of each filing year, says Sam Huszczo, a certified financial planner and founder of SGH Wealth Management in Southfield, Michigan.

"If you get in January 1 as opposed to waiting until April of the following year, you have an extra year and four months in the market," Huszczo says. "For young people, it's not about timing the market. It's about time in the market."

That isn't to say you shouldn't bother making a contribution for the prior year if, for example, you've received a windfall in the form of an economic stimulus payment. Making a contribution now for 2020 can be a great way to catch up, and you'll still have plenty of time to work on maxing out your 2021 contributions.

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How to make a prior-year IRA contribution

Of course, whether you fund your account in early April or mid-May this year won't make a huge difference over the long run. But that still doesn't mean you should wait until the 11th hour to contribute. "Don't wait until May 17, when everyone will be flooding financial institutions with contributions," Slott says. "Maybe yours won't get there in time, or they won't be able to process it. I'd do it at least a week early."

Depending on which financial institution holds your account, you'll likely have to check a box online indicating that you intend for the contribution to count for 2020, rather than 2021. If you mail in a check (a rarity these days), you should indicate on the check that it's a 2020 contribution.

For young people, the ups and downs of the market today are going to be blips in your memory in 30 years when you take it out.
Ed Slott
IRA Expert and founder of Ed Slott and Company

No matter which way you intend to pay, check with your financial institution to make sure they haven't imposed an earlier deadline, and then check afterward to make sure your contribution went to the right place, says Huszczo.

"There's nothing stopping you from waiting until the last second," he says. "But if you don't want to wait on hold for three hours or risk the possibility that it doesn't go through, get it in earlier rather than later."

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