Source: 401kcalculator.org via Flickr.
The beginning of the year is a great time to build good financial habits to make the most of your money. Unfortunately, a combination of lackluster returns for the stock market in 2015 and a frightening plunge for stocks during the first week of 2016 has convinced some people that investing right now doesn't make sense. You can take advantage of their uncertainty by doing one simple thing: opening an IRA for 2016 at your earliest opportunity.
Smart investors know that the best opportunities to make money in the stock market come when most people are afraid to invest. The current environment certainly qualifies, with a bull market that's almost seven years old seeming a bit long in the tooth. Unprecedented macroeconomic pressures like plunging oil prices and geopolitical problems from the Middle East to North Korea have most investors on edge, and that makes it all the more important for you to follow a long-term investing strategies that includes a retirement account.
How to be opportunistic
The problem that most retirement savers have is that they wait until the last minute to fund an IRA. The tax laws are very kind in this regard, letting you contribute to an IRA until the tax-filing deadline for that particular tax year. What that means is that you have until April 18 of this year to get money into an IRA and still be able to claim it as a contribution for last year.
That flexibility allows many people to do last-minute tax planning and cut their tax bill to the IRS. By contributing to a traditional IRA, most taxpayers can deduct their contributions and reduce their taxable income on their tax return. For those who prepare their returns only to find that they face a surprisingly large bill or an insufficient refund, an IRA contribution can give you a net benefit of hundreds or even thousands of dollars.
Yet investors who routinely wait until the last minute to fund their IRAs miss out on the opportunities to take advantage of short-term market disruptions to buy stocks at the most opportune times. For example, if you didn't fund a 2015 IRA last year, then you didn't have money available to take advantage of the stock market's plunge in August. Those who did could have picked up bargain prices on many individual stocks. Even those who rely on the SPDR S&P 500 (SPY +0.28%), the Vanguard Total Stock Market ETF (VTI +0.35%), and similar index-driven investments were able to buy shares on the cheap -- if they had cash available in their IRAs from contributions earlier in the year.
Get the money in
The market turbulence so far in 2016 presents another opportunity for those looking to get into the stock market without paying the expensive prices that dominate when major indexes are at all-time record highs. Many big-name stocks are well off their highs, yet the fundamental cases for most of them remain intact. Those who've already funded their 2015 IRAs have been able to follow through by buying stocks on their wish lists, and those who've responded quickly to get their 2016 IRAs fully funded could end up taking maximum advantage of the current decline.
Yet even if you're convinced that there's a bear market approaching, there's still a good argument for funding your IRA. If you do so, you'll be ready to act whenever the market does look like a good turnaround story. Trying to time the market is generally a fool's errand, but IRA brokerage accounts allow you to keep IRA money in cash indefinitely while still enjoying the tax advantages of a retirement account. By contrast, if you wait until later to fund that IRA, you might find that the mechanics of getting money into your account take long enough that your opportunity has disappeared.
The sooner you put money into your IRA for 2016, the better-prepared you'll be for whatever the market brings. Even if you decide not to invest it until later, having dry powder ready in your IRA could be the best way to get the tax benefits you want and the long-term portfolio growth you need for a prosperous retirement.
