Perhaps the single most important factor to achieving success when it comes to building a large retirement nest egg is that you contribute to your retirement accounts consistently over many years, and contribute as much as possible as you can each year. Even if you don’t always do a great job at choosing your investments, you can still secure your financial future by maximizing the amounts you save.
For the 2015 tax year, for example, you can contribute up to $5,500 to your self-directed IRA. If you’re age 50 or older, then your contribution limit is $6,500. Unfortunately, many individuals don’t have this amount of money readily available to contribute in a single lump sum. So, in order to maximize their annual self-directed IRA contribution, they need to make a plan.
The details of everyone’s plans are going to be different, but there are some general principles that apply to nearly everyone. First of all, it’s important to understand that, subject to any minimum contribution amounts that your custodian may require, you can break up your $5,500 (or $6,500) contribution amount into multiple deposits. You could, for example, plan to deposit approximately $500 each month, and build that amount into your household budget.
This can be an important way to ensure your financial success, and generally works better than trying to accumulate a large deposit amount in your savings or checking account before making the full self-directed IRA contribution at the end of the year. In fact, there are a couple different ways that the many smaller contributions over time approach are preferable.
First of all, the earlier you can make contributions each tax year, the more time your money has to grow. It might not seem like much, but the small amount of earnings and/or growth you can gain from having an additional three, six or even 12 months every single tax year can really add up.
Furthermore, if you contribute some or all of your annual self-directed IRA in January or February of the particular tax year, then you don’t have to avoid any temptations to spend it on other things. Unlike a traditional savings or checking account, you can’t change your mind and withdraw funds from a self-directed IRA early – at least without having to pay a penalty in most cases.
Finally, saving early in the year, or throughout the year, will reaffirm a healthy savings habit and let you build on those good behaviors. Developing a plan to maximize your self-directed IRA contributions each year can carry over into other areas of personal finance, including saving for your children’s college education, saving for a down payment for a new home, or for any other long-term financial goals you may have.