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Roth IRAs: The Complete Guide
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How to Find the Best Roth IRA Rates

Your rate of return depends on what you invest in

Roth individual retirement accounts (Roth IRAs) are a popular way to save for retirement, and with good reason. They offer many benefits, including tax-free growth on your contributions and earnings. While you can’t deduct your contributions (as you can with a traditional IRA), the money that you withdraw someday will be tax free, as long as you meet certain rules.

Of course, you want to make the most money possible on what you invest. So how do you find the Roth IRA that offers the best rates?

Key Takeaways

  • The rate that you’ll earn on a Roth individual retirement account (Roth IRA) depends on the investments that you’ve chosen for it.
  • Some investments, such as certificates of deposit (CDs) and bonds, can have predictable interest rates.
  • Stocks and stock funds are much less predictable but may provide a greater rate of return over the long term.
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Investing Your Roth IRA

To begin with, a Roth IRA isn’t an investment in and of itself and doesn’t pay a particular interest rate. It’s simply a vehicle that you can use to invest in other things. What you choose to invest in will determine your rate of return.

Some common investments for Roth IRAs include:

If you have a self-directed IRA (SDIRA), you can choose from even more kinds of investments, including real estate. Most financial institutions, such as banks, mutual fund companies, and brokerage firms, offer only traditional and Roth IRAs. If you want to invest in something besides the usual suspects (stocks, bonds, etc.), you will need to open a self-directed IRA with a firm that specializes in that type of account.

Predicting Your Rate of Return

It’s easy to estimate the interest rates that you might expect from fixed-rate investments, such as a CD from a bank or brokerage firm, or a corporate or government bond. With other types of investments, it can be much harder, if not impossible.

In the case of stocks, companies that have paid dividends at a consistent rate over the years are relatively predictable, at least as far as dividends go. But their share prices will still fluctuate, depending on the overall direction of the market and that company’s particular fundamentals.

With mutual funds and ETFs, your return will depend on what they invest in. An index mutual fund or ETF, for example, invests in a specific stock or bond index, such as the S&P 500, and its fortunes are tied to the performance of that index. With actively managed mutual funds, on the other hand, performance will depend on how well the manager did in choosing investments for the fund’s portfolio. Both indexes and fund managers can have good years and bad—for example, up 15% one year, down 15% the next.

Mutual funds are required to report their past performance, but that doesn’t tell you how well they’ll do in the future.

You can consult a mutual fund’s prospectus to see how it performed over various periods, such as the past 10 years. But as the fund companies are quick to note, “Past performance is no guarantee of future results.”

Over time, however, stocks have outperformed bonds and other fixed-income investments. Therefore, if you are in it for the long haul, stocks or stock funds could be a good choice. Just don’t expect a high rate of return in any given year.

As with investing outside of retirement accounts, the safest way to build a Roth IRA portfolio is to diversify among several different types of investments, such as a variety of stock and bond funds. A simple way to do that is to buy a target-date fund, which invests in a diverse portfolio based on how many years you have to go before retirement or some other important milestone.

How much can I put into a Roth individual retirement account (Roth IRA)?

The contribution limit for 2021 and 2022 is $6,000 plus a $1,000 catch-up for those who are age 50 or older. But contributions also are limited by tax filing status and modified adjusted gross income (MAGI). For example, if your filing status is married filing jointly, and your MAGI is $198,000 to $208,000 ($204,000 to $214,000 for 2022), then the amount that you can contribute is reduced. And you can’t make a Roth IRA contribution if your MAGI is $208,000 or more ($214,000 or more for 2022).

Is there any easy way to diversify my Roth IRA portfolio?

One simple way to diversify among several different types of investments, such as a variety of stock and bond funds, is to invest in a target-date fund. Composed of mutual funds or exchange-traded funds (ETFs), a target-date fund periodically rebalances asset class weights to optimize risk and returns for a predetermined time frame—for example, a person’s anticipated date of retirement. Typically, the asset allocation is designed to shift to a more conservative balance of funds as the target date approaches.

Which types of investments can you make in a Roth IRA?

Common investments are stocks, bonds, mutual funds, annuities, ETFs, and certificates of deposit (CDs). But you are not allowed to hold antiques, stamps, furniture, porcelain, antique silverware, baseball cards, comics, works of art, gems and jewelry, fine wine, electric trains, and other toys in these accounts. Coins also are not allowed, with some exceptions.

Article Sources

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  1. Internal Revenue Service. “Retirement Topics — IRA Contribution Limits.”

  2. Internal Revenue Service. “Publication 590-A: Contributions to Individual Retirement Arrangements (IRAs),” Page 2.

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