Avoid this tax-time oversight

People often make an annual IRA contribution and then forget to invest it.

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Key takeaways

  • Many people who make yearly contributions to tax-deferred accounts like traditional IRAs, Roths, or health savings accounts (HSAs) forget to take the next step to invest the money.
  • If you are overwhelmed by your investing choices, there are ways to get help.
  • It's never too late to get started if you find you have cash in your tax-deferred accounts and you want to invest it.

Near the annual IRS filing deadline, you might feel overwhelmed by lists of what not to forget on your tax return. Find all your missing deductions! Claim your missing stimulus! Make your contributions to accounts like IRAs, Roths, and health savings accounts!

On that last one, there's an extra step that too many people miss: If you don't designate the way to invest the money you contribute, it just sits in cash, week after week, not earning very much interest at today's rates.

"I just spoke with a man who had contributed for years but had never invested the money and he was very angry—at the financial industry, at the government, but mostly at himself," says Brittney Hopkins, an associate at Fidelity. Hopkins' job is to help people understand their finances better and figure out the next steps they should take.

In this man's case, he was savvy enough to make a contribution to an IRA,1 but he did not realize that this type of account works differently than his previous workplace 401(k) plans, which took his regular payroll deductions and the money was invested according to the plans qualified default investment alternative.

Despite many reminders and prompts, people often miss this step. Here's what you need to know.

1. Congratulate yourself

Making contributions is a great step: The key to long-term savings is simply to get started. Dates like the annual tax return filing deadline2 are a good way to motivate yourself to save. Associates at Fidelity like Hopkins say they see a big influx of contributions to IRAs and HSAs around this time. That is not only because the deadlines are widely touted, but also because some people choose to use their tax refund to fund their contributions to these accounts.

"There are some who will set up automatic transfers throughout the year, but most people just put in one amount, usually around April, for the year," says Andrew Jacob, a representative at Fidelity.

Consider this: If you're age 25 and invest $6,000, the maximum annual IRA contribution in 2021, that one contribution could grow to $89,847 after 40 years. If you're age 50 or older, you can contribute $7,000, which could grow to about $19,313 in 15 years.3 If you keep contributing yearly, your potential for growth could increase. (We used a 7% long-term compounded annual hypothetical rate of return and assumed the money stays invested the entire time.)

Tip: Read more about saving for retirement.

Source: Fidelity
This hypothetical example assumes the following: pre-tax contributions of $6,000 once a year until age 50, and then $7,000 until age 70 and an annual rate of return of 7%.4

2. Put your money to work

One reason many people miss the step of investing their contributions could be because they think the IRA itself is the investment. "It's an assumption people have," says Rodel Catahan, another Fidelity associate. "They ask questions like: How much does an IRA earn?"

The IRA is just the holder account where you put your contributions, but you have more options than just cash, including exchange-traded funds (ETFs), mutual funds, bonds, and CDs. The process of investing the money can be as easy as pulling a few dropdown menus and clicking a few buttons, once you know what you want to do with it.

But a hurdle for many people is that the thousands of choices for funds can be overwhelming, and people get afraid of making the wrong decision, coaches say. If you have decision overload, there are lots of resources available for sorting through your choices, including our guide to investing ideas for your IRA and managed accounts where you pay a fee for an advisor to guide you.

This is how it can work out if you stick with it: The man Hopkins was working with who had not invested his IRA contributions for nearly 10 years developed a plan to put his $10,000 nest egg into a target-date fund. These types of funds invest based on their anticipated year of retirement. You don't need to adjust your asset allocation over time because the funds become more conservative the closer you get to your retirement date. He's now in his 50s, so he'll have time before retirement to grow his assets.

Tip: Build your knowledge with our investing learning path.

3. Don't worry that it's too late

Often, the people who don't invest their IRA contributions figure it out when they are doing some other financial task, if it has not been intentional. They will notice that the account they thought was invested for their goals and time horizon has been stalled while their other invested accounts may have grown significantly. They might also be prompted by an email or a representative.

One woman that Fidelity associate Ty Woodruff spoke to realized when she was settling her late husband's accounts that the IRA he left her had never been invested, and had $200,000 sitting in cash. "But it's never too late," says Woodruff. "I got her connected with the resources she needed, and she put together a plan to invest the money."

The key is not to give up. "My clients get upset and frustrated, but then they are appreciative when they get themselves back on track," says Woodruff.

Tip: Read more about planning strategies.

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