Before you start hunting down a knife to cut off my tongue for spreading such despicable advice, let me clarify. Maxing out your IRAs is great. But I'm not here to discuss whether or not you should max out your IRAs. I want to talk about when you should be maxing out your IRAs. You can put your knife away now.

Every year towards the end of the year, the financial magazines, newspapers and weblogs will list all the smart moves you should make before the end of the year. All of them will tell you to max out your retirement accounts before it's too late. Well, in a sense they are right. If you haven't already, you should. But because their advice is the same year over year, everyone begins to think that you should max out your retirement accounts only at the end of the year. This is a very, very dumb move.

You see, it's all about understanding the cost of investing late...

If you sock away money every month and trade every month, the commissions alone will wipe out your gains if any.
This is more apparent if you have a self-directed IRA account like I do. You have a decent job making decent pay and you decide to be a good girl and sock away say $100 a month in your IRA like every smart person will do. At the end of the year you have $1200, not bad I'd say, considering you may have a mortgage and a car you have to pay off as well. Now, at the end of January, you will have $100 in your IRA. Of course, you can buy a few shares of whatever. But because the amount invested is so small the commission alone will obliterate your gains if any. Imagine you bought some shares worth $100 and you paid a $7 commission on that trade, you just lost 7%.

So you say, I can just not trade until the end of the year to minimize commissions. Smart. But now, you're faced with another problem.

If you wait until the end of the year to minimize commissions, you will lose on what you could have earned throughout the year.
Continuing from my previous example, at the end of the year, you have $1200 in your IRA. Great. Now, you can buy some shares of a mutual fund for say a $7 commission, that's just a 0.58% commission. But, had you invested at the beginning of the year, you may have made a 7% (based on a conservative estimate of historical gains in stocks) gain by the end of the year. Big deal, so I'm one year late. I can do without that meager 7%.

Really? Let's see what that 1 year will cost you 40 years down the road. If you invested $1200 every year with a 7% gain over a period of 39 years, you will have a total of $255,155.92. Not bad at all. But if you had a one year advantage, $1200 every year with a 7% gain, you will end up with $274,300.83 at the end of 40 years. In other words, you would have lost $19,144.91 after 40 years if you are just one year late. Still think it's no big deal?

"Okay, I get the point. But how do you expect me to save up $1200 at the beginning of the year?" Well, I don't.

Max out your IRAs as early as possible.
Unless you get a big chunk of cash at the beginning of every year, you can forget about maxing out your IRA in January. Most people will not be able to. So, in this case, the strategy is to put away as much as you can into your IRAs as early as possible. Pay your IRAs first. Say every month you allocate $100 to your savings and $100 to your IRA. Instead of doing that, you allocate $0 to your savings and $200 to your IRA for the first six months. You will then max out your IRA in June. You're still six months late, but you'd still be better off even if you don't earn the full 7% gain. The point is, if you can redirect some of the money to your IRA early in the year, you will thank yourself when you retire.

To summarize, maxing out your IRAs is a must. But maxing out your IRAs as early as possible versus maxing out your IRAs at the end of the year can make a considerable difference to the balance when you retire. When investing, time is your greatest ally.

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