QUESTION: I want to gift my son $5,000 for him to contribute to his IRA. Does it matter when I give him the money to do this?

ANSWER: Yes, there is an advantage to making the IRA contributions as early as possible, and thus lengthening the deferral period. This point is best demonstrated by an example. It should be noted that, although the following example assumes a traditional IRA, the principle of tax deferral on earnings also applies to the Roth IRA. Further, the Roth IRA has the advantage that qualified distributions will be tax free.

Example:
Ed begins to make annual contributions to a traditional IRA when he is age 30. He invests $5,000 each year until he reaches age 60. The IRA grows at 8 percent each year. If Ed makes these contributions at the beginning of the year, the IRA will equal $611,729 at age 60; if made at the end of the year, the IRA will equal $566,416. The difference is substantial, $ 45,313.

Rates of return are for illustration purposes only. No guaranteed result is implied. Feel free to contact me if you or someone you know has this type of situation. Financial Planning and tax planning advice presented here is general in nature, and individual circumstances make applying these general rules tricky; thus, the above answer cannot be applied to all circumstances because the slightest variation could cause a different outcome.