Front-load your IRA in January for a bigger payoff

Happy New Year! Do you have $5,500 to spare?

It’s an uncomfortable question, especially if your credit card is still smoking from last month.

But that’s the amount it takes to fully fund a traditional or Roth IRA for a year, and there’s a lot of value — a five-digit value — in front-loading your contributions.

What that means: If you do have $5,500 — say from an end-of-year bonus, overstuffed emergency fund or taxable investment account — consider adding it to your IRA now, rather than waiting until the contribution deadline as most people do.

Why now is better than later

It comes down to compound interest, which is as close as you’ll get to having your own money tree. As your investment earns a return, future returns are based on that now-larger balance.

That’s why a 25-year-old can invest $10,000 today and end up with $100,000 at age 65 — assuming a 6% average annual return — but a 45-year-old would have to invest more than $30,000 to end up with $100,000 by the same age.

A smaller head start makes a pretty striking case, too. You have a little more than 15 months to make an IRA contribution for each tax year, from January until the tax-filing deadline the following April. The robo-advisor Betterment compared average gains on 10 annual $5,500 IRA contributions — one set made on the first possible day in January and one set made the last possible day in April the next year — using 10-year periods of S&P 500 returns since 1928.

The result: The early contributions had a $14,507 balance advantage after 10 years, on average.

“By front-loading, you end up with almost a third more after 10 years,” says Dan Egan, Betterment’s director of behavioral finance and investing.

It also gets the money out of your hands

Your brain thinks now is better than later too — but by that it means, “Happy hour today, worry about retirement when you’re old and gray.” The pull of instant gratification is strong.

So there’s a behavioral perk to front-loading. The most successful savers treat savings as an expense. When deciding the rent, mortgage or car they can afford, they look at their balance after they’ve set money aside — ideally 10% to 15% of income.

When you fund your IRA at the beginning of the year, you’re not just mentally setting aside that money. IRA distribution rules make it hard — but not impossible — to get back.

Getting ahead is harder than it sounds

Many investors don’t fund their IRAs until the last possible second because they don’t have the money until then. NerdWallet’s end-of-year study found that only one-fifth of Americans who are saving for retirement planned to max out their IRA for 2016.

If you contribute a bit from each paycheck instead, you’ll still have a time advantage over people who wait and make their contribution at the finish line each April. This extra bump in investment growth isn’t worth “impoverishing yourself,” as Egan puts it. It’s just a nice bonus.

But if you want to be able to make a January lump-sum contribution for the year, consider this a first push. After all, holiday spending guilt isn’t the only feeling running high now — willpower and resolve are too. Take advantage.

Arielle O’Shea writes for NerdWallet, a personal finance website.