When is the right time to fund your IRA?

There is no standard date or age when you should begin funding an IRA. But there is an important rule of thumb: the earlier, the better. Some parents have been known to set up educational IRAs for their children while they are still in diapers.

If you’re starting an account for yourself, you’ll want to do so sooner than later. Time is the best ally for investors, so if you start an IRA in your 20s, the money you put in it will have more time to grow.

Put it this way: If you were to start an IRA at age 25 with $1,000 and put in $100 a month for the next 40 years, you’d end up with $180,000 (assuming a 6% return). If you wait until you are 35, you’ll have less than $100,000 at age 65. And if you wait until you are 45, you’ll only have about $50,000. That’s why most people in their 40s, 50s and 60s find themselves squeezing to put in as much money in their IRAs as they can, because they know they need to make up for lost time.

Remember, every $100,000 in your retirement account will earn you about $400 a month in retirement income, according to the Center for Retirement Research at Boston College. So, start as soon as you can! But first, slow down. You’ll need to meet some other goals, before starting your IRA. Experts suggest that most people ought to meet financial goals in this order:

1. Establish an emergency savings account.
2. Contribute to your 401k, up to your employer’s match.
3. Pay off your high-interest credit card debt.
4. Start either an IRA or a Roth IRA (You should base your choice on tax considerations and your estimated income after retirement).
5. Pay off other forms of debt, and put more money aside for things like vacations, home renovations or other middle-term goals.

What About the Kids?

If you have children, funding 529 education savings plans for them probably ranks in between numbers three and four on the list, after you take care of your most pressing financial needs. The cost of college is daunting: In 2013, it was approaching $17,500 at public institutions, including tuition, room and board, and topped $30,000 annually at private universities.

To meet these expenses is a challenging effort that takes careful planning, and you need to maintain a balanced perspective. It is certainly ideal to help fund your children’s education, but you may realize that your financial needs take precedent. While most parents want to help their children through at least an undergraduate education, there are other options for your kids, including taking out a loan, going to an inexpensive two-year college for basic classes or working at least part-time through university.

Save In This Order

There are also rules of thumb for how much you need to meet each goal on our priority list before you move on to the next one.

Emergency Savings

Most experts advise that Americans have six months worth of savings, either in a savings account at a bank, in a fairly liquid CD (with a term of three months and under), or in a money market account. You’ll be way ahead of the pack if you take this simple step.

Only 38% of Americans have enough money in their savings accounts to pay for unexpected expenses, such as a $1,000 emergency room visit or a $500 car repair, according to a report by Bankrate.com released in January.

Nothing will ease your financial worries faster than building up this account, which will help you avoid emergency charges on your credit cards.

Save Up to Your Employer’s Match In Your 401k

You get a tax deduction on the amount of money you put into a 401k, and if your employer has a match, you are automatically earning that much in returns, right away. This is probably the closest thing to free money you’ll see in your life. Don’t walk away from it.

Pay Off Your High-Interest Credit Card Debt

Interest rates on credit card debt are typically more than 13%. Paying off that debt is the equivalent of earning that much in the stock market, without having to ride the market’s roller coaster. In the 30 years leading up to 2013, the typical stock market investor made less than 4%, mostly because investors get panicky when the market goes down, take their money out and then sit on it for too long, until after the best of the rebound.

You need to be in the market to meet all your financial goals—but get rid of your debt, first. A credit counselor can help you consolidate your debt into one loan and negotiate terms that will help you pay the debt off faster.

Once You’re Ready, Go Fund Your IRA or Roth IRA

After you’ve successfully met these goals, you’ll be in a position to consider opening an IRA at a brokerage firm, bank or credit union. You can save up to $5,500 annually, combined, in an IRA or a Roth IRA (you can open both kinds of accounts if you like). And if you’re over 50, you can contribute an additional $1000. In most cases, if you contribute to an IRA, you can deduct the contribution this year from your taxes. If you contribute to a Roth IRA, the distributions you receive in retirement will be tax-free.

Have Some Fun

Now it’s time to consider whether to pay down your low-interest debt, like home equity loans, or the student loans you’ve been steadily chipping away at. If the interest you’re paying is only a few percentage points, you can afford to take it slowly.

You may also decide, instead, to save for more mid-range goals, like a vacation or home renovation. Just make sure the trip to Hawaii comes after you pay your future self with an IRA contribution.

Elizabeth MacBride is a writer and editor for RothIRA.com and TraditionalIRA.com. She is an expert in translating complex financial topics, including the latest research, into actionable advice that is easy to understand. Her work has appeared on CNBC, Forbes, BBC Capital, Investment News, HBR.com and many others.

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