April is here, and, for some, it’s a time to welcome spring. For others, it means a race against the clock to get their 2013 tax return done before the April 15 deadline. And part of that process frequently involves an IRA contribution.

My colleague Steve Weber and I have begun to research the behavior of Vanguard IRA investors. So far the findings have been quite interesting and hold lessons for many of us who are saving for retirement. I’d like to share a few that are particularly relevant as we close out the 2013 tax season (and start the 2014 IRA contribution window).

Take it to the max

First, the IRA contribution limit increased by $500 in 2013. This means that if you’re under age 50, you may invest up to $5,500. Those age 50 and older can contribute $6,500.

Are you investing up to the max? Our research shows that more than half of Vanguard investors who make a contribution do so to the max. This is terrific news! But the fly in the ointment is that, in 2008, the last year IRA contribution limits went up, many investors failed to take advantage of the increase. This may be due to lack of awareness. And while an additional $500 may seem trivial, over the course of a 30-year savings horizon, for example, the amount could triple in value.

Combine your decisions

Second, IRA contributions made during “tax season” tend to get parked in a money market account. While this seems reasonable on the surface, we found out that those contributions end up staying there for longer than intended and become an unplanned long-term investment.

Most likely, IRA investors are decoupling their contribution and investment decisions. To avoid this trap, consider taking a page from employer sponsors who are increasingly making target-date funds their default option for plan participants. The advantages of balanced funds are enduring—they’re low cost, diversified, professionally managed—and they provide for growth potential that a money market doesn’t, making them an appropriate long-term retirement investment.

Be an early bird

Last, if you’re one of those last-minute IRA contributors, you’re not alone. Our research found that the cohort of IRA investors making last-minute contributions (i.e., the last two weeks of the tax-filing year) was twice as large as their “early bird” counterparts who made their investment when they were first eligible in January of the prior year.

Is it procrastination? Probably. While we can debate the reason, there’s no debate that procrastination has a cost. Investing early in the tax year means that the compounding clock starts sooner rather than later. And, over the course of your working years, the procrastination “penalty” can really add up. So, if you fall in this camp, see if you can make a change this year and do your 2014 IRA contribution now.

The key takeaways from Vanguard’s new IRA research so far? Contribute the max (and the max went up for 2013), consider a target-date fund or balanced fund, and contribute early in the tax year. These tips are simple and sound, and can make tax season a little less daunting for many of us.



Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the Fund name refers to the approximate year (the target date) when an investor in the Fund would retire and leave the work force. The Fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.